A local real estate investor in Kingston is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the theater will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment: Real Estate Investor Payoff Table Payoffs are Profits States of Nature (Gasoline Availability) Decision Alternatives Shortage Stable Supply Surplus Motel $–8,000 $15,000 $22,000 Restaurant $2,000 $8,000 $6,000 Theater $6,000 $6,000 $5,000 Which option should the real estate investor choose if he uses the LaPlace criterion? Using a maximax approach, what alternative should the real estate investor choose? If the probability of a shortage of gasoline is 25%, the probability of a stable supply of gasoline is 45%, and the probability of a surplus of gasoline is 30%. Using EMV, what option should the real estate investor choose and what is that optimal expected value? What is the most the real estate investor would be willing to pay for additional information? Use Minimum Expected Regret (Minimum EOL) Use the alternative method to verify EVPI

A local real estate investor in Kingston is considering three alternative investments: a motel, a restaurant, or a theater. Profits from the motel or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the theater will be relatively stable under any conditions. The following payoff table shows the profit or loss that could result from each investment: Real Estate Investor Payoff Table Payoffs are Profits States of Nature (Gasoline Availability) Decision Alternatives Shortage Stable Supply Surplus Motel $–8,000 $15,000 $22,000 Restaurant $2,000 $8,000 $6,000 Theater $6,000 $6,000 $5,000 Which option should the real estate investor choose if he uses the LaPlace criterion? Using a maximax approach, what alternative should the real estate investor choose? If the probability of a shortage of gasoline is 25%, the probability of a stable supply of gasoline is 45%, and the probability of a surplus of gasoline is 30%. Using EMV, what option should the real estate investor choose and what is that optimal expected value? What is the most the real estate investor would be willing to pay for additional information? Use Minimum Expected Regret (Minimum EOL) Use the alternative method to verify EVPI

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 31P

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Real Estate Investor Payoff Table

		Payoffs are Profits
		States of Nature (Gasoline Availability)
Decision Alternatives	Shortage	Stable Supply	Surplus
Motel	$–8,000	$15,000	$22,000
Restaurant	$2,000	$8,000	$6,000
Theater	$6,000	$6,000	$5,000

Which option should the real estate investor choose if he uses the LaPlace criterion?
Using a maximax approach, what alternative should the real estate investor choose?
If the probability of a shortage of gasoline is 25%, the probability of a stable supply of gasoline is 45%, and the probability of a surplus of gasoline is 30%. Using EMV, what option should the real estate investor choose and what is that optimal expected value?
What is the most the real estate investor would be willing to pay for additional information? Use Minimum Expected Regret (Minimum EOL)

Use the alternative method to verify EVPI

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1. What is the most the real estate investor would be willing to pay for additional information? Use Minimum Expected Regret (Minimum EOL)

2. Use the alternative method to verify EVPI

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