Even though independent gasoline stations have been having a difficult time, Sus
ID: 469689 • Letter: E
Question
Even though independent gasoline stations have been having a difficult time, Susan Solomon has been thinking about starting her own independent gas station. Susan’s problem is to decide how large her station should be. The annual returns will depend on both the size of the station and a number of marketing factors related to oil industry and demand for gasoline. After careful analysis, Susan developed the following table:
Size of Gasoline Station
Good Market ($)
Fair Market ($)
Poor Market ($)
Small
$1500
$750
-$500
Medium
$3500
$1500
-$1000
Large
$7500
$4500
-$20,000
You may use Excel QM or QM for Windows:
1. What is the Maximax decision?
Answer:
Explanation (include software output or calculation):
Size of Gasoline Station
Good Market ($)
Fair Market ($)
Poor Market ($)
Maximum
Small
$1500
$750
-$500
$1500
Medium
$3500
$1500
-$1000
$3500
Large
$7500
$4500
-$20,000
$7500
2. What is the Maximin decision?
Answer:
Explanation (include software output or calculation):
3. What is the criterion of realism decision? Use = 0.4.
Answer:
Explanation (include software output or calculation):
4. Develop an Opportunity Loss Table.
Table:
5. What is the Minimax Regret Decision?
Answer:
Explanation (include software output or calculation):
Even though independent gasoline stations have been having a difficult time, Susan Solomon has been thinking about starting her own independent gas station. Susan’s problem is to decide how large her station should be. The annual returns will depend on both the size of the station and a number of marketing factors related to oil industry and demand for gasoline. After careful analysis, Susan developed the following table:
Size of Gasoline Station
Good Market ($)
Fair Market ($)
Poor Market ($)
Small
$1500
$750
-$500
Medium
$3500
$1500
-$1000
Large
$7500
$4500
-$20,000
You may use Excel QM or QM for Windows:
1. What is the Maximax decision?
Answer:
Explanation (include software output or calculation):
Size of Gasoline Station
Good Market ($)
Fair Market ($)
Poor Market ($)
Maximum
Small
$1500
$750
-$500
$1500
Medium
$3500
$1500
-$1000
$3500
Large
$7500
$4500
-$20,000
$7500
2. What is the Maximin decision?
Answer:
Explanation (include software output or calculation):
3. What is the criterion of realism decision? Use = 0.4.
Answer:
Explanation (include software output or calculation):
4. Develop an Opportunity Loss Table.
Table:
5. What is the Minimax Regret Decision?
Answer:
Explanation (include software output or calculation):
Size of Gasoline Station
Good Market ($)
Fair Market ($)
Poor Market ($)
Small
$1500
$750
-$500
Medium
$3500
$1500
-$1000
Large
$7500
$4500
-$20,000
Explanation / Answer
1.
Size of Gasoline Station
Good Market($)
Fair Market($)
Poor Market($)
Maximum
Small
1500
750
-500
1500
Medium
3500
1500
-1000
3500
Large
7500
4500
-20000
7500
Maximax
7500
Thus, the Maximax decision lies for Large size of gasoline with a good market.
2.
Size of Gasoline Station
Good Market($)
Fair Market($)
Poor Market($)
Minimum
Small
1500
750
-500
-500
Medium
3500
1500
-1000
-1000
Large
7500
4500
-20000
-20000
Maximin
-500
Thus, the Maximin criteria lies for Small size of gasoline station with a poor market. Therefore, the decision lies to not open a gas station.
3.
Size of Gasoline Station
Good Market($)
Fair Market($)
Poor Market($)
Weighted average / Criterion of realism = (* best market share) + (1 - ) * (worst market share)
Value of = 0.4
Small
1500
750
-500
0.4 * 1500 + 0.6 * -500 = 600 - 300 = 300
Medium
3500
1500
-1000
0.4* 3500 + 0.6 * -1000 = 1400 - 600 = 800
Large
7500
4500
-20000
0.4 * 7500 + 0.6 * -20000 = 3000 - 12000 = -9000
Therefore, the realism decision is medium size of gasoline station with a weighted average of 800.
4. Opportunity loss = Maximum pay off - Actual pay off and Minimum pay off - Actual pay off
OPPORTUNITY LOSS TABLE
Size of Gasoline Station
Good Market($)
Fair Market($)
Poor Market($)
Maximum
Small
6000 (7500 - 1500)
3750(4500 - 750)
0 [-500 - (-500)]
6000
Medium
4000 (7500 - 3500)
3000(4500 - 1500)
500 [-500 - (-1000)]
4000
Large
0 ( 7500 - 7500)
0 (4500 - 4500)
15000 [-500 - (-20000)]
15000
5. Seeing the opportunity loss of every size of market, the Minimax Regret Decision is for $4000, i.e Medium size of gasoline station.
Size of Gasoline Station
Good Market($)
Fair Market($)
Poor Market($)
Maximum
Small
1500
750
-500
1500
Medium
3500
1500
-1000
3500
Large
7500
4500
-20000
7500
Maximax
7500
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