The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects to sell between six and nine of them. What is the payoff value for the purchase of seven watermelons when the demand is for seven or more watermelons?
A) 18
B) 21
C) 24
D) 42

Question

Quizplus · Accepted Answer

If the manager purchases seven watermelons, and the demand is for seven or more, he will sell all of them for $7 each, making a total revenue of $49. The cost of purchasing the seven watermelons is $4 each, so the cost is $28. Therefore, the payoff value is $49 - $28 = $21.

Based on this calculation, the best choice would be to purchase seven watermelons. If he purchases fewer than seven, he risks not meeting demand and losing out on potential revenue. If he purchases more than seven, he risks not being able to sell all of them before they spoil, leading to a loss. Therefore, purchasing exactly seven watermelons is the best choice in this scenario.

The Manager of Paul's Fruit and Vegetable Store Is Considering