Summer 2017 BUS 190 clarifications of instructions in red)- (REVISED-NUMBERS IN

Question

Summer 2017 BUS 190 clarifications of instructions in red)- (REVISED-NUMBERS IN TABLE IN PROBLEM 1, Homework 4 (REVISED Revision 2 -an extra problem for someone else was accidentally appended and is now removed. Due Tuesday July 25 3pm 1. Consider the following payoff table: High Moderate Build Decisionproperty 150 150 a. What decision would a conservative decision-maker make? Show your work for credit. b. What decision would an optimistic decision-maker make? Show your work for credit. the decision tree that corresponds to the payoff table above. The probability of High demand 2. a. Draw 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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