Question

Jeffrey Helm owns a health and fitness center called Bulk-Up in Harrisburg. He is .. A.4 considering adding more floor space to meet increasing demand. He will either add no floor space (N), a moderate area of floor space (M), a large space (L), or an area of floor space that doubles the size of the facility (D) area of floor Demand will either stay fixed, increase slightly, or increase greatly. The following are the changes in Bulk-Up's annual profits under each combination of expansion level and demand change level: EXPANSION LEVEL M L DEMAND CHANGE N D $4,000 -$10,000 -$50,000 S Fixed $8,000 $6,000 $2,000 $4,000 Slight increase $9,000 $20,000 $40,000 $3,000 Major increase effrey is risk averse and wishes to use the maximin criterion. a. What his decision alternatives and what are the states of nature? are b. What should he do? Px

Answer 1

Under maximin criteria, the person would choose the maximum of minimum values under each alterntive.

Min value under Fixed option is -50000 ( with option D)

Min value under Slight Inrease option is 2000 ( with N)

Min value under Major increase option is 3000 ( with N)

Max value of these three option is 3000, which corresponds to N

b. The person should go ahead with no floor space alternative ( N)