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# A.

2

Even though independent gasoline stations have been having a difficult
time, Susan Helms 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:

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.

Good MarketFair
Small
50,000
Medium
80,000
Large
100,000
Very Large
300,000

Poor
Market Market
Row Min
Row Max
20,000 -10,000
-10,000
50,000
30,000 -20,000
-20,000
80,000
30,000 -40,000
-40,000
100,000
25,000 -160,000 -160,000
300,000
maximum
-10,000
300,000
maximin maximax

b. What is the maximax decision?
Using the maximax criterion, the decision is to open a very large station.
c. What is the maximin decision?
Using the maximin criterion, the decision is to not open a station (i.e., do
nothing).
d. What is the equally likely decision?

Small

Good
Fair
Poor
Market
Market
Market
Row Min Row Max Average
50,000
20,000 -10,000 -10,000
50,000 20,000

Medium Large Very Large   80.000 300.000 80.3 Clay Whybark. e.000 -40.000 30. A.000 maximum -10.000 -20.000 -40.000 30.000 30.000 55.000 100.000 Using the equally likely criterion.000 -160. created a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd): . Develop a decision tree. a soft-drink vendor at Hard Rock Cafe’s annual Rockfest.000 -160.000 30. the decision is to open a very large station.000 300.000 100. Assume each outcome is equally likely.000 25.000  maximin maximax     -20. then find the highest EMV.000 300.

200 The largest EMV is for Large Stock. and 0.   Big Average Small Maximum Probabilities 0. Best EVM is 12.000 2200 Average 14000*0.3 0.5+6000*02=1 stock 14.2 for a small demand.000 6.3+10000*0.000 4.The probabilities associated with the states of nature are 0.3*22000=66 0.   Big Average Small EMV Probabilitie s 0.2*6000=12 y 00 00 00 13800 .000 12.5-2000*02=1 stock 22.3+8000*0. a.5+4000*02=750 Small stock 9.5 0.5 0.000 -2. Determine the alternative that provides Clay Whybark the greatest expected monetary value (EMV). Compute the expected value of perfect information (EVPI).5 for an average demand.3 0.000 0400 9000*0. b.000 0     maximum 12200 Therefore.2  Larger 22000*0.5*12000=60 0.000 8.3 for a big demand. 0.3+12000*0.000 10.2  Larger stock 22000 12000 -2000  Average stock 14000 10000 6000  Small stock 9000 8000 4000  Perfect Information (Maximum in column) 22000 12000 6000  Perfect*probabilit 0.

Best Expected Value Exp Value of Perfect Info       12200       1600 The expected value of perfect information (EVPI) is 1.600. .