A souvenir retailer has an opportunity to establish a new location inside a large airport. The annual returns will depend primarily on the size of the space she rents and if the economy will be favorable. The retailer has worked with the airport concession commission, and has projected the following possible annual earnings associated with renting a small, medium, large or very large space:
Size Good Economy Fair Economy Poor Economy
Small $70,000 $28,000 -$14,000
Medium $112,000 $ 42,000 -$28,000
Large $ 140,000 $42,000 -$56,000
Very Large $ 420,000 $35,000 -$224,000
a) What is the souvenir retailer’s maximax decision?
b) What is her maximin decision?
c) What is her equally likely decision?
d) What is her criterion of realism decision, using? = 0.8?
e) What is her minimax decision?
Shamrock oil owns a parcel of land that has the potential to be an underground oil field. It will cost $500,000 to drill for oil. If oil does exist on the land, shamrock will realize a payoff of $4,000,000 (not including drill cost). With current information, shamrock estimates that there is a 0.2 probability that oil is present on the site. Shamrock also has the option of selling the land as is for $400,000, without further information about the likelihood of oil being present. A third option is to perform geological test at the site, which would cost $100,000. There is a 30% chance that the test results will be positive, after which shamrock can sell the land for $650,000 or drill the land, with a 0.65 probability that oil exists. if the test results are negative, shamrock can sell the land for $50,000 or drill the land, with a 0.05 probability that oil does exists.
a) Using a decision tree, recommend a course of action for Shamrock Oil.