Question 1A A CEO of a multihospital system is planning to expand operations into various states. It will take several years to get certificate of need (CON) approvals so that the new facilities can be constructed. The eventual cost (in millions of dollars) of building a facility will differ among states, depending upon finances, labor, and the economic and political climate. An outside consulting firm estimated the costs for the new facilities as based on declining, similar, or improving economies, and the associated probabilities as shown in the Table below. Decision alternatives Declining Same Improving Kentucky 22.00 19.00 15.00 Maryland 19.00 18.50 18.00 North carolina 19.50 17.00 15.50 Tennesee 23.00 17.00 14.00 Virginia 25.00 21.00 13.00 (e) Using a minimax regret approach, what alternative should the firm choose? (f) Economists have assigned probabilities of 0.25, 0.40, and 0.35 to the possible economic climate of declining, same and improving respectively. Using expected monetary values, what option should be chosen and what is that optimal expected value? (g) What is the most that the firm should be willing to pay for additional information? Use Expected Regret (h) Use the alternative method to verify EVPI
Question 1A
A CEO of a multihospital system is planning to expand operations into various states. It will take several years to
get certificate of need (CON) approvals so that the new facilities can be constructed. The eventual cost (in millions
of dollars) of building a facility will differ among states, depending upon finances, labor, and the economic and
political climate. An outside consulting firm estimated the costs for the new facilities as based on declining,
similar, or improving economies, and the associated probabilities as shown in the Table below.
Decision
alternatives Declining Same Improving
Kentucky 22.00 19.00 15.00
Maryland 19.00 18.50 18.00
North carolina 19.50 17.00 15.50
Tennesee 23.00 17.00 14.00
Virginia 25.00 21.00 13.00
(e) Using a minimax regret approach, what alternative should the firm choose?
(f) Economists have assigned probabilities of 0.25, 0.40, and 0.35 to the possible economic climate of
declining, same and improving respectively. Using expected monetary values, what option should be
chosen and what is that optimal expected value?
(g) What is the most that the firm should be willing to pay for additional information? Use Expected Regret
(h) Use the alternative method to verify EVPI
Step by step
Solved in 4 steps with 5 images
