Problem -
Jeffrey Helm owns a health and fitness center called Bulk-Up in Harrisburg. He is considering adding more floor space to meet increasing demand. He will either add no floor space (N), a moderate area of floor space (M), a large area of floor space (L), or an area of floor space that doubles the size of the facility (D). Demand will either stay fixed, increase slightly, or increase greatly. The following are the changes in Bulk-Up's annual profits under each combination of expansion level and demand change level:
|
Demand Change
|
Expansion Level
|
|
N
|
M
|
L
|
D
|
|
Fixed
|
$0
|
-$4,000
|
-$10,000
|
-$50,000
|
|
Slight increase
|
$2,000
|
$8,000
|
$6,000
|
$4,000
|
|
Major increase
|
$3,000
|
$9,000
|
$20,000
|
$40,000
|
Jeffrey is risk averse and wishes to use the maximin criterion.
a) What are his decision alternatives and what are the states of nature?
b) What should he do?