A company has to decide which size store to build. The profitability of a particular store...

A company has to decide which size store to build. The profitability of a particular store size depends on level of demand that ends up developing in the market, which is outside of your control. State 1 is low demand while state 2 is high demand. Use the information below to answer all parts to this question.

Payoff Table
Alternatives	State 1	State 2
Store size 1	200	175
Store size 2	150	185
Store size 3	140	200
Store size 4	50	300

Opportunity Loss Table
Alternatives	State 1	State 2
Store size 1
Store size 2
Store size 3
Store size 4

Given the information above,

What is the alternative chosen using the optimistic (maximax) approach? Explain.

What is the alternative chosen using the conservative (maximin) approach? Explain.
What is the alternative chosen using the minimax regret criterion? Explain.

Over the past 40 years, the probability of high demand is .3. Given this information,

Calculate the expected monetary value (EMV) for each store size. Which store size would an EMV maximizer choose?

Calculate the EVPI (that is, how much you should be willing to pay an economist (or a psychic) to tell you, with certainty, next year’s state of nature).

Solutions

Expert Solution

orchestra answered 1 year ago

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