A cafe in Newport has two purchasing decisions; buy high quality bread or lower quality bread for its customers. They can purchase the high quality bread for $0.75 per loaf and sell it for $1.10, or can purchase the low quality bread for $0.50 per loaf and sell it for $0.60. There is an 80% chance that they will be able to sell the high quality bread, whereas the probability of selling the lower quality bread is 0.60 (HINT: for each bread type you can calculate the probability of not selling by subtracting the selling probability from 1). Any loaves not sold by the end of the week can be sold at a local thrift shop at $0.40.
1) Draw the decision tree.
2) Per loaf of bread, calculate the Expected Value of each alternative (high versus lower quality).
3) If you are a manager at the café, should you buy high or lower quality bread?