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Office Building, or A Warehouse. The Future States of Nature That Will Determine The Profits Payoff Table For This Decision Problem Is Given Below

An investor is deciding between purchasing an apartment building, office building, or warehouse. The future economic conditions will determine profits and can be good or poor. The payoffs show apartment building has highest profits in good conditions but office building has highest potential loss in poor conditions. The probability of good conditions is 60% and poor is 40%.

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Shrey Mangal
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51 views1 page

Office Building, or A Warehouse. The Future States of Nature That Will Determine The Profits Payoff Table For This Decision Problem Is Given Below

An investor is deciding between purchasing an apartment building, office building, or warehouse. The future economic conditions will determine profits and can be good or poor. The payoffs show apartment building has highest profits in good conditions but office building has highest potential loss in poor conditions. The probability of good conditions is 60% and poor is 40%.

Uploaded by

Shrey Mangal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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An investor wants to purchase one of three types of real estate: an apartment building, an

office building, or a warehouse. The future states of nature that will determine the profits
from the three corresponding investments are Good or Poor economic conditions. The
Payoff Table for this decision problem is given below:
DECISION
(purchase)
Apartment Bld.
Office Bld
Warehouse

STATES
Of
GOOD Economic
Conditions
$50,000
$100.000
$30,000

NATURE
POOR Economic
Conditions
$30,000
-$40.000
$10,000

If, in addition, the probabilities of Economic Conditions are:


Good => 60%

Bad => 40%

Answer the following questions:


1. Obtain the Optimistic (Maximax Criterion) Solution
2. Obtain the Conservative (Minimax Criterion) Solution
3. Obtain the Minimax Regret Criterion Solution
4. Obtain the Best Expected Value Approach Solution
5. Obtain the Expected Value with Perfect Information
6. Obtain the Expected Value without Perfect Information
7. Obtain the Expected Value of the Perfect Information
8. Build a Comparative Table and recommend the Best Solution
9. Build the Decision Tree (include values & probabilities)
10. Build the Risk Profile for your selected Decision
11. Develop the Sensitivity Analysis for the three Decisions
12. Draw the Sensitivity Analysis Graph (as in Fig. 4.6)
EXPLAIN IN DETAIL HOW YOU OBTAINED YOUR RESULTS, WHAT THEY
MEAN AND HOW CAN YOU INTERPRET THEM, IN PRACTICE.

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