Question

Use following narrative to answer next 10 questions. The OC Company has purchased a land and is considering condominium development. Three sizes of development are being considered: small, medium, and large. An uncertain economy makes it difficult to ascertain the demand for new condominiums, With the three levels of demand - low, medium, high - the management has determined the profit or loss the company realizes, as shown in the table below (in thousands of dollars). Decision Low Medium High Small 400 400 400 Medium 100 600 600 Large -300 300 900 Suppose the OC Company estimates that the following probabilities hold for condominium demand: Pllow) = 0.2 P(medium) = 0.35 P(high) = 0.45 What is the maximum amount that the OC Company can pay to obtain a market research study (in order to get sample information)? Select one: O a $100,000 O b. $200,000 O c. $0 O d. Cannot be determined Clear my choice Vhat is OC Company's optimal decision if it uses the expected value criteria? elect one: O a Small Development b. Medium Development O c Large Development O d. More than one size development can be made Clear my choice

Answer 1

then the the company "segret - 500 х data, from the giren Pllow) -0.2 Plmedium) =0.35 =0.45 gedved, Regret = Opportunity loss = best playoff-pay of actually height demand = 900 Choose Small development 5400 80 Regret (ov) opportunity los 900-400 +2) Expected value - payott probability = -300x0.2 + 300 x 0.35 +900x0.45 =-60) + 105 405 met fat the company should pay, EYPI = £x with Pi - Ev with pi then Ex with Pi = Best payoff for each demand x respective probability = 400*0.2 + 600 40.35 +900 x 0.45 405 695 Ey with out PI - max Expected ralue =100 So EVPL = 695 -400 295 So the maximum the Company Should pay should be (295 + 405 Expected ralue 3) The 80 + 210 +