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Problem Set $6$

Note: You will find the Example videos in the module very helpful in answering these questions. Please type in the space provided and round your answers to the nearest whole dollar.

Question $1.$ The lease of Florida Wimsey Park, Inc., is about to expire. Management must decide whether to renew the lease for another $10$ years or to relocate near the site of a proposed motel. The city planning board is currently debating the merits of granting approval to the motel. A consultant has estimated the net present value of Theme Park's two alternatives under each state of nature $($options$)$ as shown

$\backslash$begin$\{$tabular$\}\{|$l$|$c$|$c$|\}$

$\backslash$hline & $\backslash$multicolumn$\{2\}\{|$c$|\}\{$ Options $\}\backslash \backslash$

$\backslash$hline Alternatives & Motel Approved & Motel Rejected $\backslash \backslash$

$\backslash$hline Renew & $\backslash (\backslash$$ $500,000\backslash )$ & $\backslash (\backslash$$ $3,000,000\backslash )\backslash \backslash$

$\backslash$hline Relocate & $\backslash (\backslash$$ $4,000,000\backslash )$ & $\backslash (\backslash$$ $100,000\backslash )\backslash \backslash$

$\backslash$hline

$\backslash$end$\{$tabular$\}$

Which alternative would they select for each approach given below $(40$ points, $10$ points each$)?$

$\backslash$begin$\{$tabular$\}\{|$l$|$l$|\}$

$\backslash$hline a$.$ Maximin & $\backslash \backslash$

$\backslash$hline b$.$ Maximax & $\backslash \backslash$

$\backslash$hline c$.$ LaPlace & $\backslash \backslash$

$\backslash$hline d$.$ Minimax Regret & $\backslash \backslash$

$\backslash$hline

$\backslash$end$\{$tabular$\}$ Question $2.$ Remember that when making decisions under uncertainty, one approach is for risk takers and one is for those who are risk adverse. If the outcome was important to you, which approach would you choose and why? There is no correct answer, this question is meant for you to think about your own approach to decision making $(13$ points$)$

Question $3.$ Given the probabilities for each of the options happening, complete the Expected Monetary Values $($EMV$)$ under Risk table below $(42$ points, $7$ points each$).$

Do not use commas in your answers, they will be added for you.

Question $3-$b$(5$ points$)$

Which option should we select?