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7.5.2 Sensitivity Analysis
Once the basic layout of the model is complete, we can begin to explore some of the
what - if questions that were asked by Fr. Efia. For example, what change in revenue
occurs if we increase the value of a bet to $100? Obviously, if all other factors
remain the same, revenue will increase. But will all factors remain the same? It is
conceivable that a bet of $100 will dissuade some of the attendees from attending the
event; after all, this doubles an attendee’s total exposure to losses from $150 (three
games at $50 per game) to $300 (three games at $100 per game). What percentage
of attendees might not attend? Are there some attendees that would be more likely
to attend if the bet increases? Will the Archbishop be angry when he finds out that
the value of a bet is so high? The answers to these questions are difficult to know.
The current model will not provide information on how attendees will respond since
there is no economic model included to gauge the attendee’s sensitivity to the value
of the bet, but Fr. Efia can posit a guess as to what will happen with attendance and
personally gauge the Archbishop’s response. Regardless, with this model Fr. Efia
can begin to explore the effects of these changes.
We begin sensitivity analysis by considering the question that Fr. Efia has been
struggling with—how to balance the event revenues to avoid the attention of the
Archbishop. If he places the odds of the games greatly in favor of OLPS, the
Archbishop may not sanction the event. As an alternative strategy to setting poor
player odds, he is considering increasing the entry fee to offset losses from the
current player odds. He believes he can defend this approach to the Archbishop,
especially in light of the all-you-can-eat format for ethnic foods that will be avail-
able to attendees. But of course, there are limits to the entry fee that OLPS alumni
will accept as reasonable. Certainly a fee of $10 can be considered very modest for
the opportunity to feast on at least 15 varieties of ethnic food.
So what questions might Fr. Efia pose? One obvious question is—How will
an increase in the entry fee offset an improvement in player odds? Can an entry
fee increase make up for lower game revenues? Finally, what Entry Fee increase
will offset a change to fair odds: 50-50 for bettors and OLPS? Let us consider the
Cloudy scenario in Exhibit 7.7 for our analysis. In this scenario total game revenue
is $262,500 and cost is $137,500, resulting in overall profit of $125,000. Clearly,
the entry fee will have to be raised to offset the lost gaming revenue if we improve
the attendee’s winning odds.
If we set the gaming odds to fair odds (50–50), we expect that the distribution
of game funds to OLPS and attendees will be exactly the same, since the odds are
now fair. Note that the odds have been set to 50% in cells C9, C10, and C11 in
Exhibit 7.8. Thus, the only benefit to Fr. Efia is Entry Fee, which is $25,000 as shown
in cell K23. The fair odds scenario has resulted in a $100,000 profit reduction. Now,
let us increase the Entry Fee to raise the level of profit to the desired $125,000. To
achieve such a profit we will have to set our Entry Fee to a significantly higher value.
Exhibit 7.9 shows this result in cell K23. An increase to $50 per person in cell C3
eventually achieves the desired result. Although this analysis may seem trivial since
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