Professor John Sellers
1.a. Which of the two options should Patricia pursue if she wants to open a restaurant in a suburban area of Los Angeles? Calculate the total expected utility from each restaurant option and compare.
Patricia has predetermined that if she opens a restaurant in a suburban area of Los Angeles, then taste is the most important attribute, three times as important as location, and two times as important as price. Therefore, the total expected utility for a suburban restaurant can be described as:
TEU = Taste(3) + Price(1.5) + Location(1)
Now we need to plug in her ratings for attributes for both steak and pizza restaurants:
TEU (Steak) = 80(3) + 65(1.5) + 55(1) = 240 + 97.5 + 55 = 392.5
TEU (Pizza) = 70(3) + 50(1.5) + 80(1) = 210 + 75 + 80 = 365
Therefore, opening a steak restaurant in the suburbs is the best option.
1.b. Which of the two options should she pick if she plans to open a restaurant in the Los Angeles metropolitan area?
Same process as above, except Patricia has predetermined that if she opens a restaurant in the Los Angeles metropolitan area, then location becomes three times as important as taste, and two times as important as price, so TEU is described as:
TEU = Location (3) + Price (1.5) + Taste(1)
TEU (Steak) = 55(3) + 65(1.5) + 80(1) = 165 + 97.5 + 80 = 342.5
TEU (Pizza) = 80(3) + 50(1.5) + 70(1) = 240 +75 + 70 = 385
Therefore, Patricia should open a Pizza restaurant in the metropolitan area.
1.c. Which option should she pursue if the probability of finding a restaurant venue in a suburban area can be reliably estimated as 0.7 and in a metropolitan area as 0.3?
The average expected utility for a restaurant in the suburbs could be proportionately described as 378.75, while the average in the metro is 363.75, so the utility in suburbs is only slightly better.
However, location is three times more important in the suburbs, with a 7:3 probability advantage of
References: Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education. This text is a Constellation™ course digital materials (CDM) title.