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Problem 1 A local real estate investor in Orlando is considering three alternative investments: a motel, a res taurant, or a theater. Prots from the
Problem 1 A local real estate investor in Orlando is considering three alternative investments: a motel, a res taurant, or a theater. Prots from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; prots from the theater will be relatively stable under any con- ditions. The following payoff table shows the prot 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. a. Maximax b. Maximin c. Minimax regret (L Hurwicz (a: = .4) 6. Equal likelihood Problem 2 The Miramar Company is going to introduce one of three new products: a widget, a hummer, or a njmnot. The market conditions (favorable, stable. or unfavorable) will determine the prot or loss the company realizes, as shown in the following payoff table: Market Conditions Favorable Stable Unfavorable Product .2 .7 .1 Widget $120,000 $70,000 $30,000 Hummer 60,000 40.000 20.000 Nimnot 35.000 30,000 30,000 Compute the expected value for each decision and select the best one. b. Develop the opportunity loss table and compute the expected opportunity loss for each product. c. Determine how much the rm would be willing to pay to a market research rm to gain better information about future market conditions. P' Problem 3 Given the following sequential decision tree, determine which is the optimal investment, A or B: .40 $300,000 (-$20,000) 7 .30 4 .60 $60,000 2 $45,000 Investment A .70 $75,000 (_$70'000) .20 $200,000 (317.000) 8 5 .80 $70,000 1 60 .15 $ '000 .35 $105,000 ($9,000) 9 Investment B -55 5 .65 $40,000 (~$50,000) 3 $53000 .30 $80,000 . Finish the problems by showing all your calculation procedures. If only the final answers / solutions are submitted without showing the steps used, only partial credit will be given
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