Exam 7: Decision Analysis

The probabilities assigned to each state of nature are taken from the appropriate probability distribution tables.

The expected value approach is used for major,non-recurring decisions involving several decision variables.

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 value (per thousand "hits")of perfect information?

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 economics book?

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 probability that the statistics book would wind up being placed with a smaller publisher?

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 for the optimum decision alternative?

The expected monetary value approach is most appropriate when the decision-maker is risk-neutral.

A decision tree is:

Expected monetary value gives the actual payoff one can expect in a given situation involving risk.

What is the method used for calculating EMVs in a decision tree and identifying the best alternative?