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Assignment 4 SOLUTIONS (1206A4w2008)

# Assignment 4 SOLUTIONS (1206A4w2008) - MGSC 1206.2...

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MGSC 1206.2 SOLUTIONS: Assignment #4 Winter 2008 TOTAL MARKS FOR ASSIGNMENT = 65 Due: 1 pm, Friday, February 8th Note: Points will be deducted if you do not (a) show your work including suitable calculations, (b) use proper notation, and (c) answer word problems with words. 1. Textbook Problem 9-20 (Chapter 9, pg. 390). Even though independent gasoline stations have been having a difficult time, Susan Soloman 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 both on the size of her station and on a number of marketing factors related to the oil industry and demand for gasoline. After a careful analysis, Susan developed the following table: For example, if Susan constructs a small station and the market is good, she will realize a profit of \$50,000. a. Maximax decision: very large station. b. Maximin decision: small station. c. Equally likely decision: very large station. e. See opportunity loss table below. f. Minimax decision: very large station. 2 pts 2 pts 3 pts 2 pts 2 pts Note: For full points, must show HOW you got the answer, e.g., using an extra column in the above table.

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2. Cowie Asset Management (CAM) is a property developer that is looking to develop the mainland south area of Halifax. CAM has several projects under consideration, of which it wishes to select one for immediate development. The profitability of each depends upon the amount of economic growth that occurs over the next 5 years. The government has prepared three growth forecasts, with associated probabilities, and CAM has estimated the profitability of each project for each growth scenario, as follows: Forecast Pessimistic Most Likely Optimistic Row Max Row Min EMV Project A \$250,000 \$400,000 \$450,000 450,000 250,000 395,000 Project B \$200,000 \$450,000 \$750,000 750,000 200,000 517,500 Project C \$300,000 \$300,000 \$300,000 300,000 300,000 300,000 Project D \$100,000 \$250,000 \$1,000,000 1,000,000 100,000 490,000 Probability 0.15 0.50 0.35 a) What decision should be made according to the maximax decision rule? The optimist chooses the project that has the highest possible return (i.e., “Row Max” shows the maximum profit for each project… choose the project with the maximum of these maximums) Select Project D with a maximum profit of \$1,000,000 b) What decision should be made according to the maximin decision rule? The pessimist looks for the worst to happen regardless of which project is picked. Select the project that has the highest return assuming the worst happens, i.e. among “Row Min” values… find the minimum profit for each project and then choose the project with the maximum of these minimums Select Project C with a minimum profit of \$300,000 c) What decision should be made according to the minimax regret decision rule? Regret = max profit – project profit for that state of nature
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Assignment 4 SOLUTIONS (1206A4w2008) - MGSC 1206.2...

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