9. Morley Properties is planning to build a condominium development on St. Simon

Question

9. Morley Properties is planning to build a condominium development on St. Simons Island, Georgia. The company is trying to decide between building a small, me- dium, or large development. The payoffs received for each size of development will depend on the market demand for condominiums in the area, which could be low, medium, or high. The payoff matrix for this decision problem is: Size of Development Small Medium Large Low 400 200 -400 Market Demand Medium 400 500 300 High 400 500 800 (Payoffs in $1000s) The owner of the company estimates a 21.75% chance that market demand will be low, a 35.5% chance that it will be medium, and a 42.75% chance that it will be high a. What decision should be made according to the maximax decision rule? b. What decision should be made according to the maximin decision rule? c. What decision should be made according to the minimax regret decision rule? d. What decision should be made according to the EMV decision rule? e. What decision should be made according to the EOL decision rule?

Explanation / Answer

Ans:

a)Maximax:

From above table,maximum of respective maximum is paid off by large development i.e 800.

So,decision should be Large development.

b)Maximin

From above table,maximum of respective minimums is paid off by small development i.e 400.

So,decision should be small development.

c)Minimax regret

Regret table:

Minimum of respective maximum regrets is 300 which is through medium development.so,choose medium developemnt.

d)Expected monetary value(EMV)

EMV(medium)=200*0.2175+500*0.355+500*0.4275=434.75

EMV is maximum for medium develoment,so choose medium development.

e)Expected opportuinty loss(EOL)

EOL(medium)=200*0.2175+0*0.355+300*0.4275=171.75

EOL is minimum for medium develoment,so choose medium development.

market demand low medium high maximum small 400 400 400 400 medium 200 500 500 500 large -400 300 800 800

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