1. The Miramar Company is planning to introduce one of three new sailboats for t
ID: 423509 • Letter: 1
Question
1. The Miramar Company is planning to introduce one of three new sailboats for the 2010 season: the navigator, the empress, or the seagull. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table (in millions of dollars):
Market Conditions
Product Favorable Stable Unfavorable
Navigator 120 70 -30
Empress 90 40 20
Seagull 40 35 30
a) Determine the best decision using the maximax, maximin, and minimax regret criteria.
b) What is the best alternative assuming the following probabilities for future market conditions: favorable - 0.2; stable - 0.3; and unfavorable - 0.5?
c) Determine the maximum price the firm would be willing to pay to a market research firm to gain better information about future market conditions.
Explanation / Answer
(a) Under maximax criteria, the best of the best option will be chosen, i.e.Nevigator with best value of 120.
Under maximin criteria the best of the worst options will be chosen. i.e. Seagull with best value of 30.
Under minimax regret, the option that minimises the maximum regret is chosen. For this a regret table is prepared by subtracting each item under each condition from the best option under that condition.
Table -
The minimum of the maximum regret in this case will be 30, i.e. the Empress.
2. NPV for Navigator = 120x0.2+70x0.3 - 30x0.5 = 24+21-15 = 30
NPV for Empress = 90x0.2+40x0.3+20x0.5 = 18+12+10 = 40
NPV for Seagull = 40x0.2+35x0.3+30x0.5 =8+10.5+15 = 33.5
Option Empress with highest Net Payoff Value is the best option.
3. The value of perfect infromation = value with Perfect information - value without perfect information
VPI = 120x0.2+70x0.3+30x0.5 = 24+21+15 = 60
Value of P.I = 60-40 =20.
Therefore the company should be wiling to pay 20 additional units of money for market research.
Market conditions Product Favorable Stable Unfavorable Nevigator 0 0 60 Empress 30 30 10 Seagull 80 35 0Related Questions
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