1. Consider the following payoff table: State of nature Min High Moderate Mg dem

Question

1. Consider the following payoff table: State of nature Min High Moderate Mg demand demand Build lex-1-2650 | 6500 Sell Decision property 11501150C a. What decision would a conservative decision-maker make? Show your work for credit. A Consewa tive oses he nai vin atpoach. b. What decision would an optimistic decision-maker make? Show your work for credit. The OPHmisHC appioo On Considers Phe matimum of mas Valves So maxi max aPPiodch 2. a. Draw the decision tree that corresponds to the payoff table above. The probability of High demand is .4. b. What is the expected payoff for building on the property? C. What is the expected payoff for selling the property?

Explanation / Answer

Ans:

1a)Maximin approach(Conservative approach)

Maximum of respective minimums is 2650,which is paid off by building complex.

b)Maximax(Optimistic approach)

Maximum of respective maximums is 2650,which is paid off by building complex.

2)Expected payoff by building complex=0.4*2650+0.6*6500=4960

Expected payoff by selling =0.4*1150+0.6*1150=1150

Expected pay off is more by building complex,soone should build the complex.

Expected value without perfect information(EvwoPI)=maximum EMV=4960

For EwPI,we choose maximum payoff in each scenario:

Expected value with perfect information(EwPI)=2650*0.4+6500*0.6=4960

EVPI=EwPI-EwoPI=4960-4960=0

here,EVPI is 0,as here buiding complex is giving higer payoffs than selling property in both scenarios i.e high and moderate demand.

demand High Moderate Minimum Build complex 2650 6500 2650 sell property 1150 1150 1150

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