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Decision Theory

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Do not do D in # 8

8) A local real estate investor in Orlando is considering thre3e alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourist; profits from the theater will be relatively stable under any conditions. The following payoff table shown the profit or loss that could result from each investment.
Gasoline Available
Investment Shortage Stable Supply Surplus
Motel $-8,000 $15,000 $20,000
Restaurant 2,000 8,000 6,000
Theater 6,000 6,000 5,000

Determine the best investment using the following decision criteria.
A. Maximax
B. Maximin
C. Minimax regret
D. N/A
E. Equal likelihood

18) The Miramar Company is going to introduce one of these new products: a widget, a hummer, or a nimnot. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table.
Market Conditions
Product Favorable .2 Stable .7 Unfavorable .1
Widget $120,000 $70,000 $-30,000
Hummer 60,000 40,000 20,000
Nimnot 35,000 30,000 30,000
A. Compute the expected value for each decision tree and select the best one.
B. Develop the opportunity loss table and compute the expected opportunity loss for each product.
C. Determine how much the firm would be willing to pay to a market research firm to gain better information about future market conditions.


Solution Summary

To decide best investment using decision theory.