Question

3. McHuffter Condominiums, Inc., of Pensacola, Florida, recently purchased land near the Gulf of Mexico and is attempting to determine the size of the condominium development it should build. Three sizes of develop-ment are being considered; Small, d₁; Medium, d₂; and large, d₃. At the same time, an uncertain economy makes it difficult to ascertain the   demand for the new condominiums. McHuffter's management realizes that a large development followed by a low demand could be very costly to the company. However, if McHuffter makes a conservative small-development decision and then finds a high demand, the firm's profits will be lower than they might have been. With the three levels of demand-low, medium and high. McHuffter's management has prepared the following profit ($000). (20 pts.)

         payoff table

          -------------------------------------------

                                   Demand

            Decision    ----------------------------

         Alternatives       Low    Medium    High

         -------------------------------------------

           Small, d₁         400      400      400

           Medium, d₂        100      600      600

           Large, d₃        -300      300      900

        --------------------------------------------

a) If nothing is known about the demand probabilities, what are the      recommended decision using the Maximax(optimistic), Maximin (pessi-    mistic), and Minimax regret approaches?

b) If P(low) = 0.20, P(medium) = 0.35, and P(high) = 0.45, What is the   recommended decision using the expected value approach?

c) What is the expected value of perfect information (EVPI)? You have         to use regret table to get EVPI.

Suppose that before making a final decision, McHuffter is considering

conducting a survey to help evaluate the demand for the new condominium

development. The survey report is anticipated to indicate one of two

levels of demand: weak(W) or strong(S). The relevant probabilities are as

follows: (25 pts)

    P(W)= 0.3 P(low/W)   = 0.50      P(low/S)   = 0.10

    P(S)= 0.7 P(medium/W)= 0.40      P(medium/S)= 0.25

               P(high/W) = 0.10      P(high/S) = 0.65

BDSC 340.001-3

   d) Construct a decision tree for this problem and analyze it.  

   e) What is McHuffter’s optimal decision?

   f) What is the expected value of the survey(sample) information?

     

Answer 1