HW1_soln - Homework for Decision-Making Tools Problem 1...

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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 $50,000 $20,000 $-10,000 $50,000 $-10,000 $20,000 Medium Station $95,000 $35,000 $-40,000 $95,000 $-40,000 $30,000 Large Station $150,000 $45,000 $-140,000 $150,000 $-140,000 $18,333 1. Which alternative (size of the gasoline station) should Susan choose if the decision criterion is: A maximax? maximum of row maximum is $150,000, so Susan should build a large station. B maximin? maximum of row minimums is $-10,000, so Susan should build a small station. C equally likely? highest row average is $30,000, so Susan should build a medium station.
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