Decision Theory and Expected Value

Jamaica McAllister
Assignment 2:
Strayer University
Dr. Zohre Ardalani
07/20/2014
8. A local real estate investor in Orlando is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the theater will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment: Gasoline Availability
Investment Shortage Stable Supply Surplus
Motel $8,000 $15,000 $20,000
Restaurant 2,000 8,000 6,000
Theater 6,000 6,000 5,000
Determine the best investment, using the following decision criteria.
a. Maximax 20,000 motel
b. Maximin 5,000 theater
c. Minimax regret 14,000 motel or Restaurant
d. Hurwicz(a=.4) theather 5,400
e. Equal likelihood =Motel 9,000 16. A concessions manager at the Tech versus A&M football game must decide whether to have the vendors sell sun visors or umbrellas. There is a 30% chance of rain, a 15% chance of overcast skies, and a 55% chance of sunshine, according to the weather forecast in College Junction, where the game is to be held. The manager estimates that the following profits will result from each decision, given each set of weather conditions:
Weather Conditions
Decision Rain Overcast Sunshine
.30 .15 .55
Sun visors $500 $200 $1,500
Umbrellas 2,000 0 900
a. Compute the expected value for each decision and select the best one.
The greatest profit based on highest expected value is $645, the concession can sell sun visors.
b. Develop the opportunity loss table and compute the expected opportunity loss for each decision
Expected opportunity loss for sun visors are $780 and expected opportunity loss for umbrellas is $1,320

24. In problem 13, the place plus Real Estate development firm has hired an economist to assign a probability to each direction interest rates may take over the next 5 years. The economists has determined that there is a .50 probability that interest rates will decline, a .40 probability that rates will remain stable, and a .10 probability that rates will increase.
a. Using expected value determine the best project.
The greatest expected value is 2.26 (1,000,000) which means the project with the greatest average profit is building and selling condominiums.
b.Determine the expected value of perfect information.
The expected value of perfect information is 0.75 (1,000,000)
32. Determined the best degree program in term of projected income, using the following decision criteria:

a. Maximax $320,000 Real Estate

b. Maximin $150,000 in Nursing

c. Equal Likehood would be choosing a degree in real estate

d. Hurwicz(a=.50) Maximum weighted payoff $217,500 in Real Estate.

36. .6(300,000)+.4(150,000)
180,000+ 60,000=240,000
.6(-100,000)+.4(600,000)
-60,000+240,000=180,000
.6(120,000)+.4(170,000)
72,000+68,000=140,000