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(Solved): Stevie Stone, a bellhop at the Royal Sundown Hotel in Atlanta, has been offered a management positio ...
Stevie Stone, a bellhop at the Royal Sundown Hotel in Atlanta, has been offered a management position. Although accepting the offer would assure him a job if there was a recession, if good economic conditions prevailed, he would actually make less money as a manager than as a bellhop (because of the large tips he gets as a bellhop). His salary during the next 5 years for each job, given each future economic condition, is shown in the following payoff table:
- Determine the best decision, using Hurwicz (0.4) decision criteria?
- Determine the best decision, using Equal Likelihood decision criteria?
- Determine the best decision, using minimax regret decision criteria?
\begin{tabular}{lrr} \hline & \multicolumn{2}{c}{ Economic Conditions } \\ \cline { 2 - 3 } Decision & Good & Recession \\ \hline Bellhop & & \\ Manager & 85,000 & 85,000 \\ \hline \end{tabular}
Expert Answer
Hurwicz (0.4) decision criteria:The Hurwicz criterion involves weighing the best possible outcome (under good economic conditions) and the worst possible outcome (under a recession) based on a coefficient called the "optimism coefficient" (?). In this case, the given ? value is 0.4.To determine the best decision, we calculate the weighted average payoff for each decision and choose the one with the highest value.For Stevie as a bellhop: For Stevie as a manager: Comparing the expected payoffs, Stevie's best decision using the Hurwicz decision criteria (? = 0.4) would be to accept the management position since the expected payoff of $85,000 is higher than the expected payoff of $84,000 as a bellhop.