1. Fredericton Development Inc. purchased land that will be the site of a new condominium complex. The company has three different projects to choose for this land:
small complex with 30 units (d1), medium complex with 60 units (d2), and large complex with 90 units (d3). It will select the project that will produce the largest profit given the uncertainty concerning the demand for the condominiums. The company estimates that the market demand will be strong (si), normal (s2) and weak (83). The payoff table for the three decisions is as follows:
a. Does the third decision (d3) dominates other two decisions? Explain the reason.
b. If the decision maker knows nothing about the probabilities of the four states of nature, determine the best decision by using the following decision criteria: Explain the reason in detail.
(1) Pessimist's rule
(2) Optimist's rule
(3) Minimax regret
c. Assume that it is now possible to estimate a probability for each state of demand, determine the best decision by using expected monetary value (EMV).
d. Compute the expected payoff with perfect information.
e. Compute the expected value of perfect information.
f. A survey indicates the future market conditions (h"favourable" or /2:"unfavourable"). The conditional probabilities for Ii are listed in the following tables. Determine the probability for h, and the posterior probabilities P(s j .10 with 4 decimal places for each state by using Bayes's rule.
