Question

Tom wants to build a store. He is trying to decide how big it should be. Returns will be dependent upon the size of the store and demand factors. The table for the decision analysis is as follows: Size of First Store Small Medium Large Very Large States of Nature Good Market Fair Market $40,000 $18,000 $90.000 $27,000 $105,000 $27.500 $320.000 $26,000 Poor Market - 58,000 - $22.000 -$36.000 -$180,000 if Tom constructs a small store and the market is good, his profit should be $40,000 This exercise contains only parts b, c, and d. b) Using the decision making under uncertainty with the criterion of Maximax The appropriate decision will be This decision should provide a return value of $ c) Using the decision making under uncertainty with the criterion of Maximin The appropriate decision will be This decision should provide a return value of d) Using the decision making under uncertainty with the criterion of Equally Likely The appropriate decision will be This decision should provide a return value of (enter your answer as a whole number)

Answer 1

Answer

step by step approach: Decision making under uncertainty: given information: size of state of nature market good $ fair $ small 40000 18000 -8000 medium 90000 27000 -22000 large 105000 27500 -36000 very large 320000 26000 -18000 poor $ poor $ b) Decision making under maximax criteria: size of state of nature maximax market good $ fair $ small 40000 18000 -8000 40000 medium 90000 27000 -22000 90000 large 105000 27500 -36000 105000 very large 320000 26000 -18000 320000 from the above matrix, it can be noted that, the maximum Value from all the maximum values of size of market, is $320000. so, the best decision alternative is "very large" size of the Market. with a return of $320000.

maximin c) decision making under maximin criteria: size of state of nature market good $ fair $ poor $ small 40000 18000 -8000 medium 90000 27000 -22000 large 105000 27500 -36000 very large 320000 26000 -18000 -8000 -22000 -36000 -18000 from the above metrix, it can be noted that, maximum Value from all the minimum values is $8000. thus the best decision alternative is, "small" size of the market with a return of -8000. d) decision making under equally likely criteria: (taking the average of all the state of nature values of that particular size of the market.) size of state of nature equally market good $ fair $ poor $ likely small 40000 18000 -8000 16667 medium 90000 27000 -22000 31667 large 105000 27500 -36000 32167 very large 320000 26000 -18000 109333 from the above metrix, it can be noted that, form all the average values of each state belonging to their size of market, the maximum Value is $109333. thus, the best decision alternative is to select "very large" market size. with a return of $109333 working note: small size =(40000+18000-8000)/3 16666.67 (likewise other values for each size is calculated.)

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