1. McHuffter Condominiums, Inc., of Pensacola, Florida, recentlypurchased land near the Gulf of Mexico and is attempting todetermine the size of the condominium development it should build.Three sizes of develop-ment are being considered; Small,d1; Medium, d2; and large, d3. Atthe same time, an uncertain economy makes it difficult to ascertainthe demand for the new condominiums. McHuffter's managementrealizes that a large development followed by a low demand could bevery costly to the company. However, if McHuffter makes aconservative small-development decision and then finds a highdemand, the firm's profits will be lower than they might have been.With the three levels of demand-low, medium and high. McHuffter'smanagement has prepared the following profit ($000). (20 pts.)
payofftable
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Demand
Decision ----------------------------
Alternatives Low Medium High
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Small, d1 400 400 400
Medium, d2 100 600 600
Large, d3 -300 300 900
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a) If nothing is known about thedemand probabilities, what are the recommended decision using theMaximax(optimistic), Maximin (pessimistic), and Minimax regretapproaches?
b) If P(low) = 0.20, P(medium) = 0.35,and P(high) = 0.45, What is the recommended decision using theexpected value approach?
c) What is the expected value ofperfect information (EVPI)? You have to use regret table to getEVPI.
Suppose that before making a finaldecision, McHuffter is considering
conducting a survey to help evaluatethe demand for the new condominium
development. The survey report isanticipated to indicate one of two
levels of demand: weak(W) orstrong(S). The relevant probabilities are as
follows: (25 pts)
P(W)= 0.3P(low/W) = 0.50 P(low/S) = 0.10
P(S)= 0.7P(medium/W)= 0.40 P(medium/S)=0.25
P(high/W) = 0.10 P(high/S) = 0.65
d) Construct a decision tree for thisproblem and analyze it.
e) What is McHuffter’soptimal decision?
f) What is the expectedvalue of the survey(sample) information?
Really looking forward toseeing the decision tree and the answers for E & F
Make it able to copy andpaste