A.

Even though independent gasoline stations have been having a difficult

time, Susan Helms has been thinking about starting her own independent gasoline
station. Susans problem is to decide how large her station should be. The annual
returns will depend on both the size of her station and a number of marketing factors
related to the oil industry and demand for gasoline. After a careful analysis, Susan
developed the following table:

For example, if Susan constructs a small station and the market is good, she will
realize a profit of $50,000.
a. Develop a decision table for this decision.

Good MarketFair
Small
50,000
Medium
80,000
Large
100,000
Very Large
300,000

Poor
Market Market
Row Min
Row Max
20,000 -10,000
-10,000
50,000
30,000 -20,000
-20,000
80,000
30,000 -40,000
-40,000
100,000
25,000 -160,000 -160,000
300,000
maximum
-10,000
300,000
maximin maximax

b. What is the maximax decision?

Using the maximax criterion, the decision is to open a very large station.
c. What is the maximin decision?
Using the maximin criterion, the decision is to not open a station (i.e., do
nothing).
d. What is the equally likely decision?

Small

Good
Fair
Poor
Market
Market
Market
Row Min Row Max Average
50,000
20,000 -10,000 -10,000
50,000 20,000

Medium
Large
Very
Large

80,000
100,000

30,000
30,000

300,000

25,000 -160,000 -160,000 300,000 55,000

maximum -10,000 300,000
maximin maximax

-20,000
-40,000

-20,000
-40,000

80,000 30,000
100,000 30,000

Using the equally likely criterion, the decision is to open a very large station.

e. Develop a decision tree. Assume each outcome is equally likely, then find the
highest EMV.

A.3

Clay Whybark, a soft-drink vendor at Hard Rock Cafes annual Rockfest,

created a table of conditional values for the various alternatives (stocking decision)
and states of nature (size of crowd):

The probabilities associated with the states of nature are 0.3 for a big demand, 0.5 for
an average demand, and 0.2 for a small demand.
a. Determine the alternative that provides Clay Whybark the greatest expected monetary
value (EMV).

Big
Average Small
EMV
Probabilitie
s
0.3
0.5
0.2
Larger
22000*0.3+12000*0.5-2000*02=1
stock
22,000 12,000
-2,000
2200
Average
14000*0.3+10000*0.5+6000*02=1
stock
14,000 10,000
6,000
0400
9000*0.3+8000*0.5+4000*02=750
Small stock
9,000 8,000
4,000
0

maximum
12200
Therefore, Best EVM is 12,200

The largest EMV is for Large Stock.

b. Compute the expected value of perfect information (EVPI).

Big
Average
Small
Maximum
Probabilities
0.3
0.5
0.2
Larger stock
22000
12000
-2000
Average stock
14000
10000
6000
Small stock
9000
8000
4000
Perfect
Information
(Maximum in
column)
22000
12000
6000
Perfect*probabilit 0.3*22000=66 0.5*12000=60 0.2*6000=12
y
00 00
00
13800

Best Expected
Value
Exp Value of
Perfect Info

12200

1600

The expected value of perfect information (EVPI) is 1,600.