MAT540

Week 2 Homework

Chapter 12

8. A local real estate investor in Orlando is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the theater will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment:

	Gasoline Availability
Investment	Shortage	Stable Supply	Surplus
Motel	$-8,000	$15,000	$20,000
Restaurant	2,000	8,000	6,000
Theater	6,000	6,000	5,000

Determine the best investment, using the following decision criteria.

• Maximax
• Maximin
• Minimax regret
• Hurwicz ( = 0.4)
• Equal likelihood

16. A concessions manager at the Tech versus A&M football game must decide whether to have the vendors sell sun visors or umbrellas. There is a 30% chance of rain, a 15% chance of overcast skies, and a 55% chance of sunshine, according to the weather forecast in College Junction, where the game is to be held. The manager estimates that the following profits will result from each decision, given each set of weather conditions:

	Weather Conditions
Decision	Rain	Overcast	Sunshine
	.30	.15	.55
Sun visors	$-500	$-200	$1,500
Umbrellas	2,000	0	-900

• Compute the expected value for each decision and select the best one.
• Develop the opportunity loss table and compute the expected opportunity loss for each decision.

24. In Problem 13 the Place-Plus real estate development firm has hired an economist to assign a probability to each direction interest rates may take over the next 5 years. The economist has determined that there is a .50 probability that interest rates will decline, a .40 probability that rates will remain stable, and a .10 probability that rates will increase.

• Using expected value, determine the best project.
• Determine the expected value of perfect information.

Reference Problem 13: Place-Plus, a real estate development firm, is considering several alternative development projects. These include building and leasing an office park, purchasing a parcel of land and building an office building to rent, buying and leasing a warehouse, building a strip mall, and building and selling condominiums. The financial success of these projects depends on interest rate movement in the next 5 years. The various development projects and their 5-year financial return (in $1,000,000s) given that interest rates will decline, remain stable, or increase, are shown in the following payoff table:

		Interest Rate
Project	Decline	Stable	Increase
Office park	$0.5	$1.7	$4.5
Office building	1.5	1.9	2.5
Warehouse	1.7	1.4	1.0
Mall	0.7	2.4	3.6
Condominiums	3.2	1.5	0.6

32. The director of career advising at Orange Community College wants to use decision analysis to provide information to help students decide which 2-year degree program they should pursue. The director has set up the following payoff table for six of the most popular and successful degree programs at OCC that shows the estimated 5-year gross income ($) from each degree for four future economic conditions:

	Economic Conditions
Degree Program	Recession	Average	Good	Robust
Graphic design	145,000	175,000	220,000	260,000
Nursing	150,000	180,000	205,000	215,000
Real estate	115,000	165,000	220,000	320,000
Medical technology	130,000	180,000	210,000	280,000
Culinary technology	115,000	145,000	235,000	305,000
Computer information technology	125,000	150,000	190,000	250,000

Determine the best degree program in terms of projected income, using the following decision criteria:

• Maximax
• Maximin
• Equal likelihood
• Hurwicz ( = 0.50)

36. Construct a decision tree for the decision situation described in Problem 25 and indicate the best decision.

Reference Problem 25: Fenton and Farrah Friendly, husband-and-wife car dealers, are soon going to open a new dealership. They have three offers: from a foreign compact car company, from a U.S. producer of full-sized cars, and from a truck company. The success of each type of dealership will depend on how much gasoline is going to be available during the next few years. The profit from each type of dealership, given the availability of gas, is shown in the following payoff table:

	Gasoline Availability
Dealership	Shortage	Surplus
	.6	.4
Compact cars	$ 300,000	$150,000
Full-sized cars	-100,000	600,000
Trucks	120,000	170,000

Decision Tree diagram to complete: