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Decision Making and Quantitative Methods

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A local real estate investor in orlando is considering three 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 tourists: profits from the theater will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment:

Investment Shortage Stable Supply Surplus

MOTEL $-8,000 $15,000 $20,000

RESTAURANT 2,000 $8,000 $6,000

THEATHER 6,000 6,000 5,000

Determine the best investment , using the following decision criteria

A. Maximax
B. Maximin
C. Minimax regret
D. Hurwicz (a=.4)
E. Equal likelihood

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Solution Preview

Please refer attached file for better clarity of tables and formulas.

Solution:

A.MAXIMAX

Investment Alternatives Gasoline Availability
Shortage Stable Surplus Maximum Payoff
Motel -8,000 15,000 20,000 20,000
Restaurant 2,000 8,000 6,000 8,000
Theater 6,000 6,000 5,000 6,000

We find that maximum payoffs from maximum is 20000.
So, decision should be Motel.

B. MAXIMIN
Investment Alternatives Gasoline Availability
Shortage Stable Surplus Minimum Payoff
Motel -8,000 15,000 20,000 -8,000
Restaurant 2,000 8,000 ...

Solution Summary

Solution describes the methodology to make a decision based upom Maximax, Maximin, Minimax Regret, Hurwicz and Equal Likelihood criteria.

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