V348 - Problem Set - week3 Name(s) 1. ______________________

Due on Sunday, September 10, 11:59pm via Canvas. 2. ______________________

100 points 3.. ______________________

1. (35 pts) Use the following table to answer a-d. The payoffs are in PROFITS.

	S1 (p=.3)	S2 (p=.2)	S3 (p=.2)	S4 (p=.3)
A1	35	65	0	0
A2	20	50	5	35
A3	5	0	10	25
A4	0	10	15	20

a. In a situation of uncertainty, what is the best alternative? [Use the expected value criteria to find the associated payoffs for each alternative and choose the best one.]

b. Construct a regret table using the table above. (1 point)

	S1 (p=.3)	S2 (p=.2)	S3 (p=.2)	S4 (p=.3)
A1
A2
A3
A4

c. Using EOL, what is the best alternative and associated payoff?

d. Calculate the expected value of perfect information

2. (35 pts) Use the following table to answer a-d. The payoffs are in COSTS.

	S1 (p=.25)	S2 (p=.3)	S3 (p=.2)	S4 (p=.25)
A1	0	65	15	35
A2	15	45	10	10
A3	30	10	30	30
A4	35	25	10	15

a. In a situation of uncertainty, what is the best alternative? [Use the expected value criteria to find the associated payoffs for each alternative and choose the best one.]

b. Construct a regret table using the table above.

	S1 (p=.25)	S2 (p=.3)	S3 (p=.2)	S4 (p=.25)
A1
A2
A3
A4

c. Using EOL, what is the best alternative and associated payoff?

d. The expected value of perfect information (EVPI) is:

3. (30 pts) Place-Plus, a real estate development firm, is considering several alternative development projects. These include building and leasing an office park, purchasing a parcel of land and building an office building to rent, buying and leasing a warehouse, building a strip mall, and building and selling condominiums. The financial success of these projects depends on interest rate movement in the next 5 years. The various development projects and their 5-year financial return (in $1,000,000s) given that interest rates will decline, remain stable, or increase, are shown in the following payoff table:

		Interest Rate
Project	Decline	Stable	Increase
Office park	$0.5	$1.7	$4.6
Office building	1.5	1.9	2.5
Warehouse	1.7	1.4	2.0
Mall	0.7	2.4	3.6
Condominiums	3.2	1.5	0.8

The Place-Plus real estate development firm has hired an economist to assign a probability to each direction interest rates may take over the next 5 years. The economist has determined that there is a .50 probability that interest rates will decline and .40 probability that rates will remain stable.

a. Using expected value, determine the best project.

b. What is expected value of perfect information?