Question
Bob's Bike Shop is considering three options for his facility next year. He can expand his current shop, move to a larger facility, or make
Bob's Bike Shop is considering three options for his facility next year. He can expand his current shop, move to a larger facility, or make no change. With a favorable market, the annual payoff would be $65,000 if he expands, $80,000 if he moves, and $40,000 if he does nothing. With an average market, his payoff will be $35,000, $21,000, and $15,000 respectively. With an unfavorable market, his payoff will be $-8,000, $-6,000, and $10,000 respectively.
Table 2: Bob's Payoff Table
Payoffs are Profits | |||
States of Nature (Market) | |||
Decision Alternatives | Favourable | Average | Unfavourable |
Expand | $65,000 | $35,000 | -$8,000 |
Move | $80,000 | $21,000 | -$6,000 |
No Change | $40,000 | $15,000 | $10,000 |
1. Which option should Bob choose if he uses the maximax criterion?
2. Which option should Bob choose if he uses the maximin criterion?
3. Which option should Bob choose if he uses the LaPlace criterion?
4. Which option should Bob choose if he uses the Hurwicz criterion with = 0.6?
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