Activity # 1

Group: #3
Subject: Operative administration
Members:
• Domenika Isabel Avila Aguirre
• Augusto Josue Ludeña Martinez
• Javier Antonio Peña Palacios

Exercise: Let’s say that you are considering opening up either a small or medium-sized
shop. You could also decide not to open a shop up at all. The market could be either good,
average, or bad. The probability of each is given in the following table along with your
expected net profits resulting from each scenario.
Table # 1: Expected net profits from each scenario

1) Based on the provided information, should you open a shop? If yes, what size?

States of nature
Good Average Bad
Alternative Market market Market EMV ($)
Small Shop 70000 30000 -30000 30000
Medium
Shop 105000 40000 -50000 41500
No Shop 0 0 0 0
Probabilities 0,3 0,5 0,2

𝑬𝑴𝑽𝒔 = (0.3)(70000) + (0.5)(30000) + (0.3)(−30000)

𝐸𝑀𝑉𝑠 = 30000
 𝑬𝑴𝑽𝒎 = (0.3)(105000) + (0.5)(40000) + (0.2)(−50000)
𝐸𝑀𝑉𝑚 = 41500

𝑬𝑽𝑴𝒏𝒔 = 0
To decide if we open or not the shop we will use the criteria of the expected monetary value
(EMV), because we already know the probabilitites of each of three alternatives. Also, after
calculating all the EMVs, the final decision is to open a medium shop, because it is the
highest EMV of the table presented above this paragraph

2) Calculate the EVPI

Formulas:

𝐸𝑉𝑃𝐼 = 51500 − 41500

𝐸𝑉𝑃𝐼 = 10000

Results:
EVwPI 51500

Best EMV 41500

EVPI 10000

3) Develop the opportunity losss table for this situation. What decision should be made
using the minimax regret criterion and the minimum EOL criterion?
 Opportunity loss table
Good Average Maximum in
Alternative Market market Bad Market EOL a row ($)
Small Shop 35000 10000 30000 21500 35000
Medium
Shop 0 0 50000 10000 50000
No Shop 105000 40000 0 51500 105000
Probabilities 0,3 0,5 0,2

𝐸𝑂𝐿𝑠 = (0.3)(35000) + (0.5)(10000) + (0.2)(30000)

𝐸𝑂𝐿𝑠 = 21500
𝐸𝑂𝐿𝑚 = (0.3)(0) + (0.5)(0) + (0.2)(50000)
𝐸𝑂𝐿𝑚 = 10000
𝐸𝑂𝐿𝑛𝑠 = (0.3)(105000) + (0.5)(40000) + (0.2)(0)
𝐸𝑂𝐿𝑛𝑠 = 51500

Max in row small shop= Max (small shop) = 35000

Max in row medium shop= Max (medium shop) = 50000
Max in row noshop= Max (no shop) = 105000

• The minimun EOL criterium between the three options is 10.000 so we choose to
open a medium shop.
• Minimax Regret Criterion is 35.000, so a small shop should be opened. Likewise, it is
the minimum number within the maximum opportunity loss of each alternative.