Problem -
Even though independent gasoline stations have been having a difficult time, Ian Langella has been thinking about starting his own independent gasoline station. Ian's problem is to decide how large his station should be. The annual returns will depend on both the size of his station and a number of marketing factors related to the oil industry and demand for gasoline. After a careful analysis, Ian developed the following table:
|
Size of First Station
|
Good Market ($)
|
Fair Market ($)
|
Poor Market ($)
|
|
Small
|
50,000
|
20,000
|
-10,000
|
|
Medium
|
80,000
|
30,000
|
-20,000
|
|
Large
|
100,000
|
30,000
|
-40,000
|
|
Very Large
|
300,000
|
25,000
|
-160,000
|
For example, if Ian constructs a small station and the market is good, he will realize a profit of $50,000.
a) Develop a decision table for this decision, like the one illustrated in Table A.2 earlier.
b) What is the maximax decision?
c) What is the maximin decision?
d) What is the equally likely decision?
e) Develop a decision tree. Assume each outcome is equally likely, then find the highest EMV.
