Mika Reyes is considering opening a small coffee shop on Pablo Ocampo Street, a few blocks from the University. She has found a good place that attracts students. Her choices are to open a small shop, a medium-sized shop, or not to open a shop at all. The market for a coffee shop can be good, average, or bad. The probabilities for these three possibilities are 0.20 for a good market, 0.50 for an average market, ad 0.30 for a bad market. The net profit or loss for the medium- sized and small shops for the various market conditions are given in the following table. Building no shop at all yields no loss and no gain.Decision Alternative/States of NatureGood MarketAverage MarketBad MarketSmall shop90,00035,000-50,000Medium-sized shop120,00045,000-60,000No Shop000 Probability 0.2 0.5 0.3 What decisions would be made using the Maximin approach?What decisions would be made using the Maximax approach? What decision would be made using the Maximum Likelihood approach?What decisions would be made using Bayes’ decision rule approach?
Question
Mika Reyes is considering opening a small coffee shop on Pablo Ocampo Street, a few blocks from the University. She has found a good place that attracts students. Her choices are to open a small shop, a medium-sized shop, or not to open a shop at all. The market for a coffee shop can be good, average, or bad. The probabilities for these three possibilities are 0.20 for a good market, 0.50 for an average market, ad 0.30 for a bad market. The net profit or loss for the medium- sized and small shops for the various market conditions are given in the following table. Building no shop at all yields no loss and no gain.Decision Alternative/States of NatureGood MarketAverage MarketBad MarketSmall shop90,00035,000-50,000Medium-sized shop120,00045,000-60,000No Shop000 Probability 0.2 0.5 0.3 What decisions would be made using the Maximin approach?What decisions would be made using the Maximax approach? What decision would be made using the Maximum Likelihood approach?What decisions would be made using Bayes’ decision rule approach?
Solution
The Maximin, Maximax, Maximum Likelihood, and Bayes' decision rule approaches are decision-making strategies used under uncertainty.
-
Maximin Approach: This approach is for risk-averse decision-makers. It involves choosing the decision with the highest minimum payoff. In this case, for the small shop, the minimum payoff is -50,000, for the medium-sized shop, it's -60,000, and for no shop, it's 0. So, the Maximin decision would be to not open a shop at all.
-
Maximax Approach: This approach is for risk-takers. It involves choosing the decision with the highest maximum payoff. For the small shop, the maximum payoff is 90,000, for the medium-sized shop, it's 120,000, and for no shop, it's 0. So, the Maximax decision would be to open a medium-sized shop.
-
Maximum Likelihood Approach: This approach involves choosing the decision with the highest expected payoff. The expected payoffs are calculated by multiplying the payoffs by their respective probabilities and adding them up. For the small shop, the expected payoff is (0.290,000) + (0.535,000) + (0.3*-50,000) = 18,000 + 17,500 - 15,000 = 20,500. For the medium-sized shop, it's (0.2120,000) + (0.545,000) + (0.3*-60,000) = 24,000 + 22,500 - 18,000 = 28,500. For no shop, it's 0. So, the Maximum Likelihood decision would be to open a medium-sized shop.
-
Bayes’ Decision Rule Approach: This approach involves choosing the decision that minimizes the expected loss or maximizes the expected payoff. It's similar to the Maximum Likelihood approach, but it takes into account the prior probabilities of the states of nature. In this case, the calculations would be the same as in the Maximum Likelihood approach, so the Bayes’ decision rule decision would also be to open a medium-sized shop.
Similar Questions
Mr. Annan is contemplating setting up a shopping mall in Accra or Sunyani but not both. Patronage could be high or low. He estimate there is a 50% chance patronage could be high in Accra with an associated profit of Ghc 140,000 per year, and 55% chance patronage could be high in Sunyani with a profit of 110,000 per year. If in Accra and patronage is low, he can either put in an aggressive advertisement at an estimated cost of Ghc 70,000 per year or close down the business at a loss of Ghc -150,000. Similarly, if in Sunyani and patronage is low, he can put in an aggressive advertisement at an estimated cost of 15,000 per year or close down at a cost of Ghc 50,000.Advertisement in Accra has a 55% chance of generating high patronage at a profit of Ghc 140,000 per year or medium patronage at a profit of Ghc 65,000 per year. Advertisement in Sunyani has a 65% chance of generating high patronage at a profit of Ghc 110,000 per year or medium patronage at a profit of Ghc 60,000 per year. What is the expected monetary value at for choosing Accra as the location for the mall ? Your answer must be in 2 decimal place Ghc
A growing chain is trying to decide which store location to open. The first location (A) requires a $500,000 investment in average assets and is expected to yield annual income of $75,000. The second location (B) requires a $200,000 investment in average assets and is expected to yield annual income of $38,000.(1) Compute the expected return on investment for each location.
One strategy that Starbucks uses is opening stores in areas where competing coffee shops would have little chance of staying competitive with Starbucks. What Starbucks is then essentially doing is saturating the market, a strategy that falls under Blank______ within the four Ps framework.Multiple choice question.placepricepromotionproduct
One strategy that Starbucks uses is opening stores in areas where other coffee shops would have little chance of staying competitive with Starbucks. What Starbucks is essentially doing is saturating the market, a strategy that falls under Blank______ within the six Ps framework.Multiple choice question.placepricepromotionproduct
Trevor is interested in purchasing the local hardware/sporting goods store in the small town of Dove Creek, Montana. After examining accounting records for the past several years, he found that the store has been grossing over $850 per day about 70% of the business days it is open. Estimate the probability that the store will gross over $850 for the following.(a)at least 3 out of 5 business days(b)at least 6 out of 10 business days(c)fewer than 5 out of 10 business days(d)fewer than 6 out of the next 20 business daysIf the outcome described in part (d) actually occurred, might it shake your confidence in the statement p = 0.70? Might it make you suspect that p is less than 0.70? Explain.(e)more than 17 out of the next 20 business daysIf the outcome described in part (e) actually occurred, might you suspect that p is greater than 0.70? Explain.Step 1(a)at least 3 out of 5 business daysFirst, we must determine that this is a binomial experiment. To do so, check the 5 requirements:There is a fixed number of trials, n. Yes, n =
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.