Even though independent gasoline stations have been having a difficult time, Sus

Question

Even though independent gasoline stations have been having a difficult time, Susan Solomon has been thinking about starting her own independent gasoline station. Susan%u2019s problem is to decide how large her station should be. The annual returns will depend on both the size of her station and a number of marketing factors related to the oil industry and demand for gasoline. After a careful analysis, Susan developed the following table:

Size of market Profit in Good Market Profit in Fair Market Profit in Poor Market
Small 50,000 20,000 -10,000
Medium 80,000 30,000 -20,000
Large 100,000 30,000 -40,000
Very Large 300,000 25,000 -160,000

For example, if Susan constructs a small station and the market is good, she will realize a profit of $50,000.

a) What is the maximax decision?
b) What is the maximin decision?
c) What is the equally likely decision?
d) What is the Hurwicz (criterion of realism) decision with a = 0.8?
e) What is the minimax regret decision?

Explanation / Answer

a) The maximax rule involves selecting the alternative that maximises the maximum payoff available. VERY LARGE and GOOD MARKET

b) The maximin rule involves selecting the alternative that maximises the minimum pay-off achievable. SMALL and POOR MARKET

c) Average Payroff: Small = 20000, Med = 30000, Large = 30000, Very Large = 55000

d) Small = 38000, Med = 60000, Large = 72000, Very Large = 208000

e) The minimax regret strategy is the one that minimises the maximum regret. SMALL

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