MODULE 2
For this module, you will complete the following problems from Chapter 3 of the textbook:
Problem 30-
Even though independent gasoline stations have been having a difficult time, Susan Solomon has been thinking about starting her own independent gasoline station. Susan’s problem is to decide how large her station should be. The annual returns 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 a careful analysis, Susan developed the following table:
| SIZE OF FIRST STATION
|
Good market | Fair market | Poor market |
| small | 50,000 | 20,000 | -10,000 |
| Medium | 80,000 | 30,000 | -20,000 |
| Large | 100,000 | 30,000 | -40,000 |
| Very large | 300,000 | 25,000 | -160,000 |
For example, if Susan constructs a small station
and the market is good, she will realize a profit of $50,000.
(a) Develop a decision table for this decision.
(b) What is the maximax decision?
(c) What is the maximin decision?
(d) What is the equally likely decision?
(e) What is the criterion of realism decision? Use an a value of 0.8.
(f) Develop an opportunity loss table.
(g) What is the minimax regret decision?
Problem 36-
A group of medical professionals is considering the construction of a private clinic. If the medical de- mand is high (i.e., there is a favorable market for the clinic), the physicians could realize a net profit of $100,000. If the market is not favorable, they could lose $40,000. Of course, they don’t have to proceed at all, in which case there is no cost. In the absence of any market data, the physicians’ best guess is that there is a 50–50 chance the clinic will be successful. Construct a decision tree to help analyze this prob- lem. What should the medical professionals do?
Problem37-
The physicians in Problem 3-36 have been ap- proached by a market research firm that offers to perform a study of the market at a fee of $5,000. The market researchers claim their experience enables them to use Bayes’ Theorem to make the following statements of probability:
Probability of a favorable market given a favorable study = 0.82 Probability of an unfavorable market given a favorable study = 0.18 Probability of a favorable market given an unfavorable study = 0.11 Probability of an unfavorable market given an unfavorable study = 0.89 Probability of a favorable research study = 0.55 Probability of an unfavorable research study = 0.45
(a) Develop a new decision tree for the medical pro- fessionals to reflect the options now open with the market study.
(b) Use the EMV approach to recommend a strategy.
(c) What is the expected value of sample informa- tion? How much might the physicians be willing to pay for a market study?
