The owner of Tastee Cookies needs to decide whether to lease a small, medium, or
ID: 197060 • Letter: T
Question
The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new retail outlet. She estimates that monthly profits will vary with demand for her cookies as follows:
Size of Outlet
Demand
Low
High
Small
$1000
$1000
Medium
$500
$2500
Large
$0
$3000
Q5) If she uses the minimax regret criterion, what size outlet will she decide to lease?
Q7) If she feels there is a 30% chance that demand will be high, what is her expected value of perfect information?
Q8) For what range of probability that demand will be high, will she decide to lease the small facility?
Size of Outlet
Demand
Low
High
Small
$1000
$1000
Medium
$500
$2500
Large
$0
$3000
Explanation / Answer
5. If she uses the minimax regret criterion, she will decide to lease the medium size outlet.
7. If she feels there is a 30% chance that demand will be high, then her expected value of perfect information is $500.
8. For a probaibility range of 0-0.25, she will decide to lease the small facility.
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