Question
firm has to decide which one of the three locations is the best to open a...
firm has to decide which one of the three locations is the best to open a new branch. The profitability of each location is affected by the economic conditions and the economic conditions may go up, remain stable or go down with different probabilities. The decision problem faced by the firm is presented in the form of a payoff table as shown below:
|
States |
of |
Nature |
||
|
Up (0.5) |
Stable (0.3) |
Down (0.2) |
||
|
Decision Alternatives |
s 1 |
s 2 |
s 3 |
|
|
Location A |
d 1 |
$100,000 |
$30,000 |
$0 |
|
Location B |
d 2 |
$80,000 |
$55,000 |
$25,000 |
|
Location C |
d 3 |
$55,000 |
$55,000 |
$55,000 |
What is the appropriate decision if a maximax approach is
used?
| A. |
Choose either location A or location C |
|
| B. |
Choose either location B or location C |
|
| C. |
Choose location C |
|
| D. |
Choose location A |
|
| E. |
Choose location B |
Homework Answers
Answer #1
Location A is the recommended option to open a new branch under maximax approach. Pls. refer the calculations below.
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