Claire and Matt met in Yoga class three years ago and became very close friends. This...
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Claire and Matt met in Yoga class three years ago and became very close friends. This year, they graduated from university. Claire has a degree in hospitality management and Matt has a degree in social sciences. While they were searching for a job, Claire's aunt who owns a convenience store came up with an idea of opening a small buffet next to a university campus and offered to assist them with her expertise. After many brainstorming sessions, they have identified three possible strategies. The first strategy is to hire a person and to invest in a 24 hours open buffet where they can serve all type of snacks for the students during all times. In a favorable market, they should be able to obtain a net profit of $10,000 over the next one year. If the market is unfavorable, they can lose $8000. The second strategy is not to hire a person and serve all type of snacks for the students until 7 pm. With a favorable market, they could get a return of $8000. With an unfavorable market, they would incur a loss of $4000. The third strategy is not opening the buffet. Claire is basically a risk taker, whereas Matt tries to avoid risk. a) What type of decision criterion should Claire use? What would Claire's decision be? Justify and show your work/calculations. (6 points) b) What type of decision maker is Matt? What decision would Matt make? Justify and show your work/calculations. (6 points) c) If Claire and Matt were indifferent to risk, what type of decision approach should they use? What would their decision be? Justify and show your work/calculations. (6 points) d) What is the best option that minimizes regrets of Claire and Matt? Show your work/calculations. (8 points) e) What would be the optimal choice for Claire and Matt if market research suggested that the likelihood of a favorable market was 0.25? Use the EMV/EP criterion. Show your work/calculations. (4 points) f) What is the expected value of perfect information (EVPI) under the probabilities given in e)? Show your work/calculations. Verbally communicate the result. (6 points) Claire and Matt met in Yoga class three years ago and became very close friends. This year, they graduated from university. Claire has a degree in hospitality management and Matt has a degree in social sciences. While they were searching for a job, Claire's aunt who owns a convenience store came up with an idea of opening a small buffet next to a university campus and offered to assist them with her expertise. After many brainstorming sessions, they have identified three possible strategies. The first strategy is to hire a person and to invest in a 24 hours open buffet where they can serve all type of snacks for the students during all times. In a favorable market, they should be able to obtain a net profit of $10,000 over the next one year. If the market is unfavorable, they can lose $8000. The second strategy is not to hire a person and serve all type of snacks for the students until 7 pm. With a favorable market, they could get a return of $8000. With an unfavorable market, they would incur a loss of $4000. The third strategy is not opening the buffet. Claire is basically a risk taker, whereas Matt tries to avoid risk. a) What type of decision criterion should Claire use? What would Claire's decision be? Justify and show your work/calculations. (6 points) b) What type of decision maker is Matt? What decision would Matt make? Justify and show your work/calculations. (6 points) c) If Claire and Matt were indifferent to risk, what type of decision approach should they use? What would their decision be? Justify and show your work/calculations. (6 points) d) What is the best option that minimizes regrets of Claire and Matt? Show your work/calculations. (8 points) e) What would be the optimal choice for Claire and Matt if market research suggested that the likelihood of a favorable market was 0.25? Use the EMV/EP criterion. Show your work/calculations. (4 points) f) What is the expected value of perfect information (EVPI) under the probabilities given in e)? Show your work/calculations. Verbally communicate the result. (6 points)
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a Claire is basically a risk taker and so Claire should use criterion of optimism where the alternative corresponding to the maximum of the maximum payoffs of the alternatives is chosen taking maximum ... View the full answer
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