SAMPLE PROBLEM SET

1. Susans Problem is to decide how large is to decide how large her station should be. The
annual return depends 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 MARKET GOOD MARKET FAIR MARKET POOR MARKET
STATION
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
What is the maximax decision?
What is the maximin decision?
What is the equally likely decision?
What is the criteria of realism decision?
What is the minimax regret decision?

2. Jerry Smith, a business analyst, is considering whether to build a large manufacturing firm,
a small manufacturing firm, and no facility at all. With a favourable market, Jerry Smith
can expect to make $90000 from the large facility and $60000 from the small facility. If
the market is unfavourable, however, Jerry Smith, estimates that he would lose $30000
with a large facility and $20000 with a small facility. Because of the expense involved in
developing the initial molds and acquiring the necessary equipment to produce fibreglass
sailboats for young children, Jerry Smith has decided to conduct a pilot study to make sure
that the market for the sailboats will be adequate. She estimates that the pilot study will
cost her $10000. Furthermore, the pilot study can be either favourable or Unfavourable.
Jerry Smith estimates that the probability of favourable market given favourable pilot
study is 0.8. The probability of unfavourable market given unfavourable pilot study is 0.9.
Jerry Smith feels that there is a 0.65 chance that the pilot study is favourable. Of course,
Jerry Smith could bypass the pilot study and simply make the decision as to whether to
build a large plant, small plant, or no facility at all. Without doing any testing in a pilot
study, he estimates the probability of a favourable market is 0.6. What is your
recommendation? Compute the EVSI.