Homework for Decision-Making Tools

Problem 1
Even though independent gasoline stations have been having a difficult time in recently years, Susan Solomon is thinking about starting her own independent gasoline station. Before starting construction, Susan needs to determine the size of her gasoline station since the annual return will depend on both the size of her station and a number of marketing factors related to the oil industry and demand for gasoline. After some careful calculations, Susan developed the following table.

| |Future gasoline market |
| |(states of nature) |
|Alternative |Good |Fair |Poor |Row Max. |Row Min. |Row Ave. |Max |
| | | | | | | |Regret |
|Small Station |$40,000 |$20,000 |$-10,000 | | | | |
|Medium Station |$80,000 |$35,000 |$-20,000 | | | | |
|Large Station |$150,000 |$25,000 |$-140,000 | | | | |

1. Which alternative (size of the gasoline station) should Susan choose if the decision criterion is:
A maximax?
B maximin?
C equally likely?
D minimax regret?

2. After some discussion with her friends in oil industry, Susan estimates (subjectively) that the probabilities of having a good market, fair market, and poor market are 0.4, 0.3, and 0.3, respectively.
A. Determine the expected profit (EMV) for each decision alternative. Which alternative is the best?
B. Compute the expected value of