expected value criterion

Question description

For this discussion topic each student is required to have at least 2 postings: One answering at least one of the questions and a second responding to another student’s posting. Please select a question that has not been answered by the time you post your response. You can select any question to answer once all questions are answered. Please do not copy another student’s posting.

This discussion will close at midnight Sunday, November 18th.

1. The owner of the Burger Doodle Restaurant is considering two ways to expand operations: open a drive-up window or serve breakfast. The increase in profits resulting from these proposed expansions depends on whether a competitor opens a franchise down the street. The possible profits from each expansion in operations, given both future competitive situations, are shown in the following payoff table:

Competitor

Decision Open Not Open

_______________________________________________________

Drive-up window $ – 6,000 $20,000

Breakfast 4,000 8,000

Select the best decision, using the following decision criteria.

a. Maximax

b. Maximin

2. Stevie Stone, a bellhop at the Royal Sundown Hotel in Atlanta, has been offered a management position. Although accepting the offer would assure him a job if there were a recession, if good economic conditions prevailed, he would actually make less money as a manager than as a bellhop (because of the large tips he gets as a bellhop). His salary during the next 5 years for each job, given each future economic condition, is shown in the following payoff table:

Economic Conditions

Decision Good Recession

_____________________________________________________

Bellhop $120,000 $60,000

Manager 85,000 85,000

Select the best decision, using the Minimax regret decision criteria.

3. For information given in Question 2, select the best decision, using the following decision criteria.

a. Hurwicz (α= .4)

b. Equal likelihood

4. 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

a. Determine which type of dealership the couple should purchase using the expected value criterion.

b. Determine the expected value of perfect information.

5. For information given in Question 4, determine the best decision alternative using the expected opportunity loss criterion.

6. Allen Abbott has a wide-curving, uphill driveway leading to his garage. When there is a heavy snow, Allen hires a local carpenter, who shovels snow on the side in the winter, to shovel his driveway. The snow shoveler charges $30 to shovel the driveway. Following is a probability distribution of the number of heavy snows each winter:

Heavy Snows Probability

___________________________________

1 .13

2 .18

3 .26

4 .23

5 .10

6 .07

7 .03

____________________________________

Allen is considering purchasing a new self-propelled snowblower for $625 that would allow him, his wife, or his children to clear the driveway after a snow. Determine the best decision alternative using the expected value criterion. Discuss what you think Allen’s decision should be and why.