a.) Draw a decision tree. b.) Determine the expected payoff for each decision and event node. c.) Whichalternative–buildingasmallfacilityorbuildingalargefacility–hasthe higher expected payoff?
a.) Draw a decision tree. b.) Determine the expected payoff for each decision and event node. c.) Whichalternative–buildingasmallfacilityorbuildingalargefacility–hasthe higher expected payoff?
a.) Draw a decision tree. b.) Determine the expected payoff for each decision and event node. c.) Whichalternative–buildingasmallfacilityorbuildingalargefacility–hasthe higher expected payoff?
A store owner must decide whether to build a small or a large facility at a new location. Demand at a location can be either small or large, which probabilities estimated to be 0.4 and 0.6, respectively. If small facility is built and demand proves to be high, the manager may choose not to expand (payoff=P235,000) or to expand (payoff=P275,000). If a small facility is built and demand is low, there is no reason to expand and the payoff is P220,000. If a large facility is built and demand proves to be low, the choice is to do nothing (P60,000) or to stimulate demand through local advertising. The response to advertising may be either modest or sizable, with their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff grows to P230,000 if the response is sizable. Finally, if a large facility is built and demand turns out to be high, the payoff is P900,000. a.) Draw a decision tree. b.) Determine the expected payoff for each decision and event node. c.) Whichalternative–buildingasmallfacilityorbuildingalargefacility–hasthe higher expected payoff?
Transcribed Image Text:6:39
MESSENGER
now
Notification
DECISION THEORY
1. A store owner must decide whether to build a small or a large facility at a new location.
Demand at a location can be either small or large, which probabilities estimated to be 0.4
and 0.6, respectively. If small facility is built and demand proves to be high, the manager
may choose not to expand (payoff=P235,000) or to expand (payoff=P275,000). If a small
facility is builtand demand is low, there is no reason to expand and the payoff is P220,000.
If a large facility is built and demand proves to be low, the choice is to do nothing
(P60,000) or to stimulate demand through local advertising. The response to advertising
may be either modest or sizable, with their probabilities estimated to be 0.3 and 0.7,
respectively. If it is modest, the payoff grows to P230,000 if the response is sizable. Finally,
if a large facility is built and demand turns out to be high, the payoff is P900,000.
a.) Draw a decision tree.
b.) Determine the expected payoff for each decision and event node.
c.) Which alternative – building a small facility or building a large facility – has the
higher expected payoff?
2. The lease contract of Alpha-Omega Inc., is about to expire. Management must decide
whether to renew the lease for another ten years or to relocate near the site of a
proposed restaurant. The town planning board is currently debating the merits of
granting approval to the restaurant. A consultant has estimated the net present value of
Alpha-Omega's two alternatives under each rate of nature as shown below. What course
of action would you recommend using?
а.) Мaximax
b.) Мaximin
c.) Laplace
d.) Minimax regret
Options
Restaurant Approved
Restaurant Rejected
Renew
P500,000
P4,000,000
P200,000
Relocate
P6,000,000
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
