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Review the data file and answer the questions. Your answers should be submitted in the form of a Word document. The Word document should include ALL your answers including any charts, tables, or graphs required. Answer questions with complete sentences and using appropriate units and notation.You need to submit the Excel files that supports your work ( make sure to include everything in your Word document.)
Morley Properties
1. Morley Properties is planning to build a condominium development on St. Simons Island, Georgia. The company is trying to decide between building a small, medium, or large development. The payoffs received for each size of development will depend on the market demand for condominiums in the area, which could be low, medium, or high. The payoff matrix for this decision problem is:


Market Demand 

Size of Development 
Low 
Medium 
High 
Small 
500 
400 
400 
Medium 
200 
500 
500 
Large 
400 
300 
800 
(Payoffs in $1000s)
The owner of the company estimates a 20% chance that market demand will be low, a 35% chance that it will be medium, and a 45% chance that it will be high.
a. What decision should be made according to the maximax decision rule?
b. What decision should be made according to the maximin decision rule?
c. What decision should be made according to the minimax regret decision rule?
d. What decision should be made according to the EMV decision rule?
e. What decision should be made according to the EOL decision rule?
2. Morley Properties can hire a consultant to predict the most likely level of demand for this project. This consultant has done many similar studies and has provided Morley Properties with the following conditional probability table, that is, P(Actual Demand  Forecast Demand):

Actual Demand

Forecast Demand

Low

Medium

High

Low

0.8000

0.1500

0.0500

Medium

0.1000

0.8000

0.1000

High

0.0500

0.1000

0.8500

For example: P(Actual Demand=Medium  Forecast Demand=Low) = 0.15
Morley Properties estimates that the probability that she forecasts Low, Medium and High demand is as follows: 0.2175, 0.3550 and 0.4275, respectively.
a. What is the EMV of the optimal decision without the consultant’s assistance?
b. Construct a decision tree Morley Properties would use to analyze the decision problem if the consultant is hired at a cost of $0.
c. What is the EMV of the optimal decision with the consultant’s free assistance?
d. What is the maximum price Morley Properties should be willing to pay the consultant?
3. Refer to part 1. Suppose that the utility function for the owner of Morley Properties can be approximated by the exponential utility function:
U
(
x
)
=
1
−
e
(
−
x
R
)
where the risk tolerance value R = 100 (in $1000s).
a. Convert the payoff matrix to utility values.
b. What decision provides the owner of the company with the largest expected utility?
4. Refer to part 2. Suppose that the consultant’s fee is $5,000 and the utility function for the owner of Morley Properties can be approximated by the exponential utility function:
U
(
x
)
=
1
−
e
(
−
x
R
)
where the risk tolerance value R = 100 (in $1000s).
a. What expected level of utility is realized if Morley Properties hires the consultant?
b. What expected level of utility is realized if Morley Properties does not hire the consultant?
c. Based on this analysis, should Morley Properties hire the consultant?