A local real estate investor in Montego Bay is considering three alternative investments: a motel, a restaurant, or a theatre. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the theatre will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment: Real Estate Investor Payoff Table Payoffs are Profits States of Nature (Gasoline Availability) Decision Alternatives 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 A. Which option should the real estate investor choose if he uses the LaPlace criterion? B. Using a maximax approach, what alternative should the real estate investor choose? C. If the probability of a shortage of gasoline is 25%, the probability of a stable supply of gasoline is 45%, and the probability of a surplus of gasoline is 30%. Using EMV, what option should the real estate investor choose and what is that optimal expected value? D. Calculate the Expected value of Perfect Information.
A local real estate investor in Montego Bay is considering three alternative investments: a motel,
a restaurant, or a theatre. Profits from the motel or restaurant will be affected by the availability
of gasoline and the number of tourists; profits from the theatre will be relatively stable under any
conditions. The following payoff table shows the profit or loss that could result from each
investment:
Real Estate Investor Payoff Table
Payoffs are Profits
States of Nature (Gasoline Availability)
Decision Alternatives 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
A. Which option should the real estate investor choose if he uses the LaPlace criterion?
B. Using a maximax approach, what alternative should the real estate investor choose?
C. If the probability of a shortage of gasoline is 25%, the probability of a stable supply of
gasoline is 45%, and the probability of a surplus of gasoline is 30%. Using EMV, what
option should the real estate investor choose and what is that optimal expected value?
D. Calculate the Expected value of Perfect Information.
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