A property development company is planning to build a block of student apartments in Lusaka’s Mass Media area. The company is yet to decide what size of block to build: a small, medium, or large. The payoffs of each size will depend on the demand for student accommodation in the area, which could be low, medium, high. The Developer estimates a 25%, 35%, and 40% chance of low, medium, and high demand, respectively. Below is a payoffs matrix (in K’000) showing the annual payoffs for the decision problem. Size of Block Market Demand Low Medium High Small 400 400 400 Medium 200 500 500 Large -400 300 800 Required: Identify the decision alternatives and uncertain conditions surrounding them? What is the optimal decision if the Developer is conservative? What is the optimal decision if the Developer is a risk taker? What is the optimal decision if the Developer wishes to minimize the Expected Opportunity Loss on the decision to be taken?
QUESTION TWO
A property development company is planning to build a block of student apartments in Lusaka’s Mass Media area. The company is yet to decide what size of block to build: a small, medium, or large. The payoffs of each size will depend on the demand for student accommodation in the area, which could be low, medium, high. The Developer estimates a 25%, 35%, and 40% chance of low, medium, and high demand, respectively.
Below is a payoffs matrix (in K’000) showing the annual payoffs for the decision problem.
|
Size of Block |
Market Demand |
||
|
Low |
Medium |
High |
|
|
Small |
400 |
400 |
400 |
|
Medium |
200 |
500 |
500 |
|
Large |
-400 |
300 |
800 |
Required:
Identify the decision alternatives and uncertain conditions surrounding them?
What is the optimal decision if the Developer is conservative?
What is the optimal decision if the Developer is a risk taker?
What is the optimal decision if the Developer wishes to minimize the Expected Opportunity Loss on the decision to be taken?
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