Question

More Practice Problems 6,7a: The lease of Theme Park, Inc. is about to expire. Management must decide whether to renew or relocate to be nearer the site of a proposed hotel, which may or may not be issued a permit.* A consultant has estimated the NPV profits as follows: Option Hotel Permit Approved Hotel Permit Denied Renew Lease 500K 4,000K Relocate 5,000K 100K • What course of action is recommended under: | a- Maximax b- Maximin c- Laplace d-MinimaxRegret • If it's determined that the permit has a 35% chance of acceptance, the decision to make to maximize expected profits is.... 66 It seems likely that a theme park would need to go through a permitting process to relocate, but this problem ignores that.

Answer 1

Option	Hotel permit aproved	Hotel permit denied
Renew Lease	500000	4000000
Relocate	5000000	100000
A- For Maximax=
Option	Hotel permit approved	Hotel permit denied	Maximum
Renew Lease	500000	4000000	4000000
Relocate	5000000	100000	5000000
Here we will select the maximum of the maximum values, which is 5000000
So the option to select is Relocate
B= For maximin
Option	Hotel permit approved	Hotel permit denied	Minimum
Renew Lease	500000	4000000	500000
Relocate	5000000	100000	100000
Here we will select the maximum of the minimum values, which is 100000
So the option to select is Relocate
C= For Laplace=
Option	Hotel permit approved	Hotel permit denied	Average Payoff
Renew Lease	500000	4000000	2250000
Relocate	5000000	100000	2550000
In Laplace, we will select the option with the maximum average payoff
So the option to be selected is Relocate
d= For minimax regret
Option	Hotel permit aproved	Hotel permit denied
Renew Lease	500000	4000000
Relocate	5000000	100000
We will find the regrettable by subtracting the maximum value of each column with other values in the column. So we will get the following regret table
Option	Hotel permit aproved	Hotel permit denied
Renew Lease	4500000	0
Relocate	0	3900000
Now we will select the maximum regret
Option	Hotel permit approved	Hotel permit denied	Maximum
Renew Lease	4500000	0	4500000
Relocate	0	3900000	3900000
As we have the minimax regret, so we will choose the minimum of maximum regret which is Relocate