Maria Rojas is considering the possibility of opening a small dress shop on Fairbanks Avenue, Avenue, a few blocks from the university. university. She has located a good mall that attracts students. er option are to open a small shop, a medium! si"ed shop, or no shop at all. #he market for a dress shop can be good, average or bad. #he probabilities for these three possibilities are $.% for a good market, $.& for an average market, and $.' for a bad market. #he net pro(t or loss for the medium!si"ed and small shops for the various market condition are given in the following table. )uilding no shop at all yield no loss and no gain. a. *hat do you recommend+ b. alculate the -/0 c. 1evel 1evelop op the the opp oppor ortun tunit ity y loss loss tab table le for for this this situ situati ation on.. *hat *hat dec decis isio ions ns would be made made using the minima2 regret regret criterion and the minimum minimum -34 criterion+ Alternative 5ood Market 678 Average Market )ad Market Small Shop 9&,$$$ %&,$$$ !:$,$$$ Medium!si"ed Shop ;$$,$$$ '&,$$$ !<$,$$$ =o shop $ $ $
al )ender and )ecky Addison have known each other since high school. #wo years ago they entered the same university and today they are taking under graduate courses in the business school. )oth hope to graduate with degrees in (nance. 0n an attempt to make e2tra money and to use some of the knowledge gained from their business courses. al and )ecky have decided to look into the possibility of starting a small company that would provide word processing services to students who needed term papers or other reports prepared in a professional manner. >sing a system approach, al and )ecky have identi(ed three strategies. Strategy ; is to invest in a fairly e2pensive microcomputer system with a high!?uality laser printer. 0n a favorable market, they should be able to obtain a net pro(t of 7;$,$$$ over the ne2t two years. 0f the market unfavorable, they can lose 7@,$$$. Strategy % is to purchase a less e2pensive system. *ith a favor market, they could get a return during the ne2t two years of 7@,$$$. *ith an unfavorable market, they would incur a loss of 7:,$$$. #heir (nal strategy, strategy ', is to do nothing. al is basically a risk taker, whereas )ecky tries to avoid risk. a. *hat type of decision procedure should al use+ b. *hat type of decision maker is )etty+ *hat decision would )etty make+ c. 0f al and )ecky were indierent to risk, what type of decision approach should they use+
Monica )ritt has enjoyed sailing small boats since she was 9 years old, when her mother started sailing with her. #oday, Monica is considering the possibility of starting a company produce small sailboats for recreational market. >nlike other mass!produced sailboats, however, these boats will be made speci(cally for children between the ages of;$ and ;&. #he boats will be of the highest ?uality and e2tremely stable, and the sail si"e will be reduced to prevent problems of capsi"ing. er basic decision is whether to build a large manufacturing facility, a small manufacturing facility, or no facility at all. *ith a favorable market, Monica can e2pect to make 7B$,$$$ from the large facility or 7<$,$$$ from the smaller facility. 0f the market is unfavorable, however. Monica estimates that she would lose 7'$,$$$ with the large facility, and she would lose only 7%$,$$$ with the small facility. )ecause of the e2pensive involved in developing in initial molds and ac?uiring the necessary e?uipment to (berglass sailboats for young children, Monica has decided to conduct a pilot study to make sure that the market for the sailboats will be ade?uate. She estimates that the pilot study will cost her 7;$,$$$. Furthermore, can be either favorable or unfavorable. Monica feels that there is a $.<& chance that the pilot study will be favorable. 3f course, Monica could bypass the pilot study and simply make the decision as to whether to build a large plant, small plant, or no facility at all. *ithout doing any testing in a pilot study, she estimates that the probability of a favorable market is $.<. What do you recommend? Compute the EVSI.
