Reference no: EM133088539
Problem 1:
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.
ADM2302 Section A, B, C, D and E Assignment 3
Fall 2021 Page 2
a) What type of decision criterion should Claire use? What would Claire's decision be? Justify and show your work/calculations.
b) What type of decision maker is Matt? What decision would Matt make? Justify and show your work/calculations.
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.
d) What is the best option that minimizes regrets of Claire and Matt? Show your work/calculations.
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.
f) What is the expected value of perfect information (EVPI) under the probabilities given in e)? Show your work/calculations. Verbally communicate the result.