Case: Pittsburgh Development Corporation (PDC)
Pittsburgh Development Corporation (PDC) has purchased land, which will be the site of a new luxury condominium complex. The location provides a spectacular view of downtown Pittsburgh and the Golden Triangle where the Allegheny and Monongahela rivers meet to form the Ohio River. PDC plans to price the individual condominium units between $300,000 and $1,400,000.
PDC has preliminary architectural drawings for three different-sized projects: one with 30 condominiums, one with 60 condominiums, and one with 90 condominiums. The financial success of the project depends upon the size of the condominium complex and the chance event concerning the demand for the condominiums. The statement of the PDC decision problem is to select the size of the new luxury condominium project that will lead to the largest profit given the uncertainty concerning the demand for the condominiums.
Given the statement of the problem, it is clear that the decision is to select the best size for the condominium complex. PDC has the following three decision alternatives:
d1 = a small complex with 30 condominiums
d2 = a medium complex with 60 condominiums
d3 = a large complex with 90 condominiums
A factor in selecting the best decision alternative is the uncertainty associated with the chance event concerning the demand for the condominiums. When asked about the possible demand for the condominiums, PDC's president acknowledged a wide range of possibilities, but decided that it would be adequate to consider two possible chance event outcomes: a strong demand and a weak demand. So,
P(s1) = P(strong demand for the condominiums) = 0,8
P(s2) = P(weak demand for the condominiums) = 0,2
Thus, management must first select a decision alternative (complex size), then a state of nature follows (demand for the condominiums), and finally a consequence will occur. In this case, the consequence is the PDC's profit.
PAYOFF TABLE FOR THE PDC CONDOMINIUM PROJECT
(PAYOFFS IN $ MILLION)
|
|
Strong Demand s1
|
Weak Demand s2
|
|
Small complex (d1)
|
8
|
7
|
|
Medium complex (d2)
|
14
|
5
|
|
Large complex (d3)
|
20
|
-9
|