Question

Ken Golden has just purchased a franchise from Paper Warehouse to open a party goods store. Paper Warehouse offers three sizes of stores: Standard - 4000 sq ft; Super - 6500 sq ft; and Mega - 8500 sq ft. Ken estimates that the present worth profitability of this store will be based on the size of the store he selects to build as well as the number of competing party goods stores in the area. He feels that between 1 and 4 stores will open to compete with him. Ken has developed the following payoff table (showing estimated present worth profits in $10,000s) to help him in his decision making.

Number of Competing Stores that will Open

Types of Stores	1	2	3	4
Standard	40	20	10	-10
Super	60	40	30	-20
Mega	200	60	0	-100

A. If Ken is an optimistic decision maker, what size of store should he open?

Enter Standard, Super, or Mega

B. If Ken is a pessimistic decision maker, what size store should he open?

Enter Standard, Super, or Mega

Ken talked to an Economist who estimated the the following likelihoods for each State of Nature
P(1 Competing Store) = .4
P(2 Competing Stores) = .3
P(3 Competing Stores) = .2
P(4 Competing Stores) = .1

Using these probablilties, find each of the following:
The Expected Monetary Value of Standard =

The Expected Monetary Value of Super =

The Expected Monetary Value of Mega =

The Expected Value Under Certainty =

The Expected Value of Perfect Information =

Answer 1

Solution: