2. Construct a decision tree for Problem #1 to help you in your decision analysis. What alternative should be chosen and what is the expected payoff?
2. Construct a decision tree for Problem #1 to help you in your decision analysis. What alternative should be chosen and what is the expected payoff?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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1. A grocery store chain must decide whether to build a regular or a large store in Future City. There is also the option of not opening any store at all. The decision depends on the market potential of Future City and this potential might be high, medium, or low. The potential profits in each case are shown in the payoff table below (in P1,000):
| High | Medium | Low | |
| Regular | 17,500 | 9,500 | -3,000 |
| Large | 32,000 | 11,500 | -4,500 |
| None | 0 | 0 | 0 |
- Identify the decision to be made, the decision alternatives, the chance event and the states of nature for this problem.
- What alternative should be chosen under the maximax criterion? What is the payoff for this decision?
- Determine the minimax regret decision.
- Given that the probabilities of high, medium and low market potentials are 0.35, 0.45, and 0.2, respectively, determine the optimal decision using the Bayes’ decision rule (expected value approach).
2. Construct a decision tree for Problem #1 to help you in your decision analysis. What alternative should be chosen and what is the expected payoff?
Please answer Problem #2
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