Terso P.

Gregorio Jr BSF 2-B

Answers and Solutions:

a. What is the decision, and what is the chance event?
The decision here is to choose the best lease option and the chance event is the
number of miles Amy will drive per year.
b. Construct a payoff table for Amy’s problem.
To illustrate how the payoffs computed, assuming Amy drives 15,000 miles per year to
compute the total cost of the Hepburn Honda
 Hepburn Honda
Total Cost = (Total Monthly Charges) + (Total Additional Mileage Cost)
= 36months($299) + $0.15(45,000 – 36,000)
= $10,764 + $1,350
= $12,114

Annual Miles Driven

Dealer 12,000 15,000 18,000
Hepburn Honda 10,764 12,114 13,464
Midtown Motors 11,160 11,160 12,960
Hopkins Automotive 11,700 11,700 11,700

c. If Amy has no idea which of three mileage assumptions is most appropriate, what is the
recommend design (leasing option) using optimistic, conservative, and minimax regret
approaches?
Decision Alternative Minimum Cost Maximum Cost
Hepburn Honda 10,764 13,464
Midtown Motors 11,160 12,960
Hopkins Automotive 11,700 11,700

Optimistic Approach (Best of Bests) would be the Hepburn Honda which is $10,764. For
the Conservative Approach (Best of Worsts) it would be the Hopkins Automotive which
is $11,700
Opportunity Loss or Regret Table
Decision Alternative 36,000 45,000 54,000 Maximum Regret
Hepburn Honda 0 $954 $1,764 $1,764
Midtown Motors $396 0 $1,260 $1,260
Hopkins Automotive $936 $540 0 $936

For the Minimax Regret Approach (Minimum of Maximum Regrets), it would be the
Hopkins Automotive.
For costs, Regret = Payoff Received – Best Payoff
10,764 – 10,764 = 0 12,114 – 11,160 = 954 13,464 – 11,700 = 1,764
11,160 – 10,764 = 396 11,160 – 11,160 = 0 12,960 – 11,700 = 1,260
11,700 – 10, 764 = 936 11,700 – 11,160 = 540 11,700 – 11,700 = 0