Case Scenario:
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 30 25 10 5
Super 60 40 30 20
Mega 100 65 15 -100
A. If Ken is an optimistic decision maker, what size of store should he open?
B. If Ken is a pessimistic decision maker, what size store should he open?
Hint: For sub questions (a) and (b), if a decision maker is optimistic, s/he would use the maximax decision criterion and if s/he is pessimistic, a maximin criterion would be used.
C. Ken believes that there is a 50% chance that 2 competing stores will open and that the likelihood that four competing stores will open is half the likelihood that 3 competing stores will open and three times the likelihood that 1 competing store will open. If Ken uses the expected value criterion, which store size should he open?