A local real estate investor in Orlando is considering three alternative investm

Question

A local real estate investor in Orlando 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: Inv estment Weather Conditions Shortage Stable Supply Surplus Motel $ - 7,500 $12,000 $23,000 Restaurant 3000 7,000 6,500 Theater 5000 6,000 4,000 Determine the best investment, using the following decision criteria. a. Maximax b. Maximin c. Minimax regret d. Hurwicz ( = 0.4 ) e. Equal likelihood

Explanation / Answer

Maximax:

We take Row maximum as follows:

So Maximax Value is 23 for Motel investment. This is best investment in the given states of nature.

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Next is MaxiMin

now we take row minimum values as follows:

Sop this is maximin value

now we take column maximum

BECAUSE MAXIMIN IS NOT EQUAL TO MINIMAX, THERE IS NO SADDLE POINT.

THIS MEANS THAT THE GAMES HAS NO PURE STRATEGY BUT HAS ONLY A MIXED STRATEGY

Action / state of nature weather condition shortage stable Motel (M) -7,5 12 23 Restaurent(R) 3 7 6.5 Theatre(T) 5 6 4

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