Even though independent gasoline stations have been having a difficult time, lan

Question

Even though independent gasoline stations have been having a difficult time, lan Langella has been thinking about starting his own independent gasoline station. lan's problem is to decide how large his station should be related to the oil industry and demand for gasoline. After a careful analysis. lan developed the following table: . The annual returns will depend on both the size of his station and a number of marketing factors Size of FirstGood Station Small Medium Large Very Large States of Nature Fair MarketMarket Market $50,000$20,000$10,000 $80,000$30,000$20,000 $100,000 $30,000 $40,000 $300000 $25,000 -$180,000 Poor For example, f lan constructs a small station and the market is good, he will ealize a profit of $50,000 This exercise contains only part e e) The correct decision tree for lan, if each outoome is equally likely, is presented in

Explanation / Answer

a) The correect decision tree for equally likely outcome is figure 2.

Expected Value of Small = (50000+20000-10000)/3 = 20000

Expected Value of Medium = (80000+30000-20000)/3 = 30000

Expected Value of Large = (100000+30000-40000)/3 = 30000

Expected Value of Very large = (300000+25000-160000)/3 = 55000

EV of Very large is the maximum, i.e. 55000. Therefore, it is the best alternative.

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