Question

Problem 1

The manager of a construction company must decide whether to build single family homes, apartments, or condominiums. Profits (in thousands of dollars) are given in the following table and depend on various possible population trends. The probability of a declining population is 0.3, the probability for a stable population is 0.5 and the probability of a growing population is 0.2

Payoff table (in thousands of dollars):

	Population
	Declining	Stable	Growing
Single Family Homes	220	80	75
Apartments	85	175	100
Condominiums	30	90	240

a)           If the manager is an extreme optimist, which alternative would she choose?

b)           If the manager is an extreme pessimist, which alternative would she choose?

c)           If the manager wants to minimize maximum regret, which alternative should she choose?

d)           If the manager wants to maximize expected values, which alternative should she choose?

e)           What is the most amount of money that she should be willing to spend to get more information about the possible population trends?

Answer 1

Formulas

a)
extreme optimist- maximax
= 240
for decision 3 ,
hence Condominiums

b)
pessimists - maximin
= 85
for decision 2
hence Apartments

c)
minimum regret = 140
decision 2
hence Apartments

d)
Maximum Expected value = 133
decision 2
hence Apartments

e) EVPI = 68.5

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