Even though independent gasoline stations have been having a

Even though independent gasoline stations have been having a difficult time, Susan has been thinking about starting her own independent gas station. Susan

Solution

The maximax decision is larger size at good market 170000$

the maximin decision is smaller size at good market :70000$

criteria for realism

small: 0.6*70000(highest) +( 0.4*(-30000)(lowest)= 30000

medium:0.6*110000 +( 0.4*(-40000))= 50000

large:0.6* 170000 + (0.4* (-50000))= 82000

largest value of these is 82000 and large size should be considered

opportunity loss table

Size of Gasoline Station

Good Market ($)

Fair Market ($)

Poor Market ($)

Small

$100,000

$40,000

$0

Medium

$60,000

$20,000

$10,000

Large

$0

$0

$20,000

the above values are derived as follows:

In the first column of the payoff matrix, the largest number is 170000, so each of the three numbers in that column must be subtracted from 170000. In the second column, we must subtract each payoff from 70000 and in the third column from -30000.

minimax regret decision: 20000$

maximum value from each row is taken

small: 100000

medium: 60000

large 20000

hence minimax is the minimum of the above value 20000$