Exam 7: Decision Analysis

The advertising manager for Roadside Restaurants,Inc.needs to decide whether to spend this month's budget for advertising on print media,television,or a mixture of the two.Her goal is to minimize the costs associated with reaching her audience.She estimates that the cost per thousand "hits" (readers or viewers)will vary depending upon the success of the new cable television network she plans to use,as follows: If she feels that there is a 60% chance that the new cable network will be successful,what is her expected cost (per thousand "hits")under certainty?

One local hospital has just enough space and funds presently available to start either a cancer or heart research lab.If administration decides on the cancer lab,there is a 20 percent chance of getting $100,000 in outside funding from the American Cancer Society next year,and an 80 percent chance of getting nothing.If the cancer research lab is funded the first year,no additional outside funding will be available the second year.However,if it is not funded the first year,then management estimates the chances are 50 percent it will get $100,000 the following year,and 50 percent that it will get nothing again.If,however,the hospital's management decides to go with the heart lab,then there's a 50 percent chance of getting $50,000 in outside funding from the American Heart Association the first year,and a 50 percent chance of getting nothing.If the heart lab is funded the first year,management estimates a 40 percent chance of getting another $50,000,and a 60 percent chance of getting nothing additional the second year.If it is not funded the first year,then management estimates a 60 percent chance for getting $50,000,and a 40 percent chance of getting nothing in the following year.For both the cancer and heart research labs,no further possible funding is anticipated beyond the first two years.What is the expected value for the decision alternative to select the heart lab?

Determining the probability distribution which results in the best alternative is called:

Decision trees are analyzed from left to right.

One local hospital has just enough space and funds presently available to start either a cancer or heart research lab.If administration decides on the cancer lab,there is a 20 percent chance of getting $100,000 in outside funding from the American Cancer Society next year,and an 80 percent chance of getting nothing.If the cancer research lab is funded the first year,no additional outside funding will be available the second year.However,if it is not funded the first year,then management estimates the chances are 50 percent it will get $100,000 the following year,and 50 percent that it will get nothing again.If,however,the hospital's management decides to go with the heart lab,then there's a 50 percent chance of getting $50,000 in outside funding from the American Heart Association the first year,and a 50 percent chance of getting nothing.If the heart lab is funded the first year,management estimates a 40 percent chance of getting another $50,000,and a 60 percent chance of getting nothing additional the second year.If it is not funded the first year,then management estimates a 60 percent chance for getting $50,000,and a 40 percent chance of getting nothing in the following year.For both the cancer and heart research labs,no further possible funding is anticipated beyond the first two years.What would be the total payoff if the heart lab were funded in both the first and second years?

The EVPI indicates an upper limit on the amount a decision-maker should be willing to spend to obtain perfect information.

The construction manager for Acme Construction,Inc.must decide whether to build single-family homes,apartments,or condominiums.He estimates annual profits (in $000)will vary with the population trend as follows: If he feels the chances of declining,stable,and growing population trends are 40%,50%,and 10%,respectively,what is his expected value of perfect information?

The local operations manager for the Canada Revenue Agency must decide whether to hire one,two,or three temporary tax examiners for the upcoming tax season.She estimates that net revenues (in thousands of dollars)will vary with how well taxpayers comply with the new tax code just passed by Parliament,as follows: If she feels the chances of low,medium,and high compliance are 20%,30%,and 50%,respectively,what are the expected net revenues for the number of assistants she will decide to hire?

The operations manager for a well-drilling company must recommend whether to build a new facility,expand his existing one,or do nothing.He estimates that long-run profits (in $000)will vary with the amount of precipitation (rainfall)as follows: If he feels the chances of low,normal,and high precipitation are 30%,20%,and 50%,respectively,what is his expected value of perfect information?

One local hospital has just enough space and funds presently available to start either a cancer or heart research lab.If administration decides on the cancer lab,there is a 20 percent chance of getting $100,000 in outside funding from the American Cancer Society next year,and an 80 percent chance of getting nothing.If the cancer research lab is funded the first year,no additional outside funding will be available the second year.However,if it is not funded the first year,then management estimates the chances are 50 percent it will get $100,000 the following year,and 50 percent that it will get nothing again.If,however,the hospital's management decides to go with the heart lab,then there's a 50 percent chance of getting $50,000 in outside funding from the American Heart Association the first year,and a 50 percent chance of getting nothing.If the heart lab is funded the first year,management estimates a 40 percent chance of getting another $50,000,and a 60 percent chance of getting nothing additional the second year.If it is not funded the first year,then management estimates a 60 percent chance for getting $50,000,and a 40 percent chance of getting nothing in the following year.For both the cancer and heart research labs,no further possible funding is anticipated beyond the first two years.What is the probability that the heart lab will be funded in both the first and second years?

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production.(Due to budgeting constraints,only one new picture can be undertaken at this time.)She feels that script #1 has a 70 percent chance of earning about $10,000,000 over the long run,but a 30 percent chance of losing $2,000,000.If this movie is successful,then a sequel could also be produced,with an 80 percent chance of earning $5,000,000,but a 20 percent chance of losing $1,000,000.On the other hand,she feels that script #2 has a 60 percent chance of earning $12,000,000,but a 40 percent chance of losing $3,000,000.If successful,its sequel would have a 50 percent chance of earning $8,000,000,but a 50 percent chance of losing $4,000,000.Of course,in either case,if the original movie were a "flop",then no sequel would be produced.What is the expected value of selecting script #1?

Decision maker's values,preferences and attitudes toward risk can be modelled.What is this called?

In order to use the expected value approach,one needs to determine the probabilities of future payoffs.

A manager has learned that annual profits from four alternatives being considered for solving a capacity problem are projected to be $15,000 for A, $30,000 for B, $45,000 for C, and $60,000 for D if state of nature 1 occurs; and $60,000 for A, $80,000 for B, $90,000 for C, and $35,000 for D if state of nature 2 occurs. (i) If P(State of Nature 1) is .40, what alternative has the highest expected monetary value? (ii) Determine the range of P(S2) for which each alternative would be optimal. (i) Max EMV is C ($72) (ii) Refer to the diagram, above. Ranges: D is optimal from 0 < .214 C is optimal from > .214 to 1.00

Typically the choice to "do nothing" based on a preference to stick with the status quo is not considered in the list of possible alternatives for a decision.

Graphical sensitivity analysis is limited to cases with no more than two alternatives.

One local hospital has just enough space and funds presently available to start either a cancer or heart research lab.If administration decides on the cancer lab,there is a 20 percent chance of getting $100,000 in outside funding from the American Cancer Society next year,and an 80 percent chance of getting nothing.If the cancer research lab is funded the first year,no additional outside funding will be available the second year.However,if it is not funded the first year,then management estimates the chances are 50 percent it will get $100,000 the following year,and 50 percent that it will get nothing again.If,however,the hospital's management decides to go with the heart lab,then there's a 50 percent chance of getting $50,000 in outside funding from the American Heart Association the first year,and a 50 percent chance of getting nothing.If the heart lab is funded the first year,management estimates a 40 percent chance of getting another $50,000,and a 60 percent chance of getting nothing additional the second year.If it is not funded the first year,then management estimates a 60 percent chance for getting $50,000,and a 40 percent chance of getting nothing in the following year.For both the cancer and heart research labs,no further possible funding is anticipated beyond the first two years.What is the expected value for the optimum decision alternative?

Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book,they have a 50 percent chance of placing it with a major publisher,and it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80 percent chance of placing it with a smaller publisher,with ultimate sales of 30,000 copies.On the other hand,if they write a statistics book,they feel they have a 40 percent chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50 percent chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies.What is the expected value for the decision alternative to write the statistics book?

A manager is quite concerned about the recent deterioration of a section of the roof on a building that houses her firm's computer operations.According to her assistant there are three options which merit consideration: A,B,and C. (i)Draw a decision tree for this problem. (ii)Using expected monetary value,which alternative should be chosen? EMV: A = $12,500,B = $18,400,C = $16,000 so choose B C.If condition III materializes,the costs will be $10,000 for A,$15,000 for B,and $19,000 for C.Moreover,there are three possible future conditions that must be included in the analysis: I,which has a probability of occurrence of .5; II,which has a probability of .3; and III,which has a probability of .2.If condition I materializes,A will cost $12,000,B will cost $20,000,and C will cost $16,000.If condition II materializes,the costs will be $15,000 for A,$18,000 for B,and $14,000 for

The advertising manager for Roadside Restaurants,Inc.needs to decide whether to spend this month's budget for advertising on print media,television,or a mixture of the two.Her goal is to minimize the costs associated with reaching her audience.She estimates that the cost per thousand "hits" (readers or viewers)will vary depending upon the success of the new cable television network she plans to use,as follows: For what range of probability that the new cable network will be successful will she select the print media strategy?