In: Statistics and Probability
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).