Ken Golden has just purchased a franchise from Paper Warehouse to open a party g
ID: 2830882 • Letter: K
Question
Ken Golden has just purchased a franchise from Paper Warehouse to open a party goods store. Paper Warehouse offers three sizes of stores: Standard - 4000 sq ft; Super - 6500 sq ft; and Mega - 8500 sq ft. Ken estimates that the present worth profitability of this store will be based on the size of the store he selects to build as well as the number of competing party goods stores in the area. He feels that between 1 and 4 stores will open to compete with him. Ken has developed the following payoff table (showing estimated present worth profits in $10,000s) to help him in his decision making.
Number of Competing Stores that will Open
Types of Stores
1
2
3
4
Standard
30
25
10
5
Super
60
40
30
20
Mega
100
65
15
-100
A. If Ken is an optimistic decision maker, what size of store should he open?
Enter Standard, Super, or Mega
B. If Ken is a pessimistic decision maker, what size store should he open?
Enter Standard, Super, or Mega
C. Ken believes that there is a 50% chance that 2 competing stores will open and that the likelihood that four competing stores will open is half the likelihood that 3 competing stores will open. He also believes that the likelihood that four competing stores will open is three times the likelihood that 1 competing store will open.
What are the Probabilities for each State of Nature
P(1 Competing Store) =
P(2 Competing Stores) = .5
P(3 Competing Stores) =
P(4 Competing Stores) =
Total 1.0
Give you answers to 2 decimal places (.xx)
Ken talked to a Economist who estimated the the following likelihoods for each State of Nature
P(1 Competing Store) = .3
P(2 Competing Stores) = .3
P(3 Competing Stores) = .1
P(4 Competing Stores) = .3
Using these probablilties, find each of the following:
The Expected Monetary Value of Standard =
The Expected Monetary Value of Super =
The Expected Monetary Value of Mega =
The Expected Value Under Certainty =
Use 1 decimal place (xx.x)
Number of Competing Stores that will Open
Explanation / Answer
A. Mega
B. Standard
C. P(1 Store) = 0.05, P(3 Stores) = 0.3 , P(4 stores) = 0.15
D.
The Expected Monetary Value of Standard = 0.3*30 + 0.3*25 + 0.1*10 + 0.3*5 = 19
The Expected Monetary Value of Super = 0.3*60 + 0.3*40 + 0.1*30 + 0.3*20 = 39
The Expected Monetary Value of Mega = 0.3*100 + 0.3*65 + 0.1*15 + 0.3*(-100) = 21
The Expected Value Under Certainty = Average of above three expected values = (19+21+39)/3 = 26.34
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