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Management Decisions: optimistic, conservative strategies

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3. The table shows both prospective profits and losses for a company, depending on what decision is made and what state of nature occurs. Use the information to determine what the company should do.

s1 s2 s3
d1 30 80 -30
d2 100 30 -40
d3 -80 -10 120
d4 20 20 20

a. if an optimistic strategy is used.
b. if a conservative strategy is used.
c. if minimax regret is the strategy.

4. Dollar Department Stores has the opportunity of acquiring either 3, 5, or 10 leases from the bankrupt Granite Variety Store chain. Dollar estimates the profit potential of the leases depends on the state of the economy over the next five years. There are four possible states of the economy as modeled by Dollar Department Stores, and its president estimates P(s1) = .4, P(s2) = .3, P(s3) = .1, and P(s4) = .2. The utility has also been estimated. Given the payoffs (in $1,000,000's) and utility values below, which decision should Dollar make?

Payoff Table

State Of The Economy
Over The Next 5 Years
Decision s1 s2 s3 s4

d1 -- buy 10 leases 10 5 0 -20
d2 -- buy 5 leases 5 0 -1 -10
d3 -- buy 3 leases 2 1 0 - 1
d4 -- do not buy 0 0 0 0

Utility Table

Payoff (in $1,000,000's) +10 +5 +2 +1 0 -1 -10 -20
Utility +10 +5 +2 +1 0 -1 -20 -50

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