7. Sonia is planning to start a new designer cloth shop. Her problem is to decide how large her shop should be. The annual returns will depend on both the size of her shop and a number of marketing factors related to the current market conditions and demand for designer wear. After a careful analysis, Sonia came up with the following table: Size of Shop Good Market (R.O.) Fair Market (R.o.) Poor market (R.O.) Small Scale 1024 NNNN -500 Medium Scale 1500 3000 -2000 Large Scale 2000 3000 -4000 Very Large Scale 3000 5000 -7000 a) What will be her decision based on Pessimist criteria? b) What will be her decision based on Optimistic criteria? c) What will be her decision based Laplace criteria?
7. Sonia is planning to start a new designer cloth shop. Her problem is to decide how large her shop should be. The annual returns will depend on both the size of her shop and a number of marketing factors related to the current market conditions and demand for designer wear. After a careful analysis, Sonia came up with the following table: Size of Shop Good Market (R.O.) Fair Market (R.o.) Poor market (R.O.) Small Scale 1024 NNNN -500 Medium Scale 1500 3000 -2000 Large Scale 2000 3000 -4000 Very Large Scale 3000 5000 -7000 a) What will be her decision based on Pessimist criteria? b) What will be her decision based on Optimistic criteria? c) What will be her decision based Laplace criteria?
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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important note: NNNN = 8428
Transcribed Image Text:7. Sonia is planning to start a new designer cloth shop. Her problem is to decide how large her shop should be.
The annual returns will depend on both the size of her shop and a number of marketing factors related to the
current market conditions and demand for designer wear. After a careful analysis, Sonia came up with the
following table:
Size of Shop
Good Market (R.O.)
Fair Market (R.o.)
Poor market (R.O.)
Small Scale
1024
NNNN
-500
Medium Scale
1500
3000
-2000
Large Scale
2000
3000
-4000
Very Large Scale 3000
5000
-7000
a) What will be her decision based on Pessimist criteria?
b) What will be her decision based on Optimistic criteria?
c) What will be her decision based Laplace criteria?
Expert Solution
Step 1
Decision-making criteria has many approaches known as:
1. Pessimist criteria or the maximin criteria
2. Optimistic criteria or the maximax approach
3. Laplace criteria or the average approach
Step 2 Part a
Under pessimist criteria, the person should locate and identify minimum values across the options and then select the maximum of them
Hence, identifying minimum values across the size of the shop we get,
Small Scale = -500
Medium Scale = -200
Large scale = -4000
Very Large scale= -7000
Now, we select the maximum out of the above, we get = -500
Final answer: According to the pessimist criteria small scale shop would be her decision
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