Exam 18: Statistical Tools for Managers

A toy manufacturer makes stuffed kittens and puppies which have relatively lifelike motions. There are three different mechanisms which can be installed in these "pets." These toys will sell for the same price regardless of the mechanism installed, but each mechanism has its own variable cost and setup cost. Profit, therefore, is dependent upon the choice of mechanism and upon the level of demand. The manufacturer has in hand a forecast of demand that suggests a 0.2 probability of light demand, a 0.45 probability of moderate demand, and a probability of 0.35 of heavy demand. Payoffs for each mechanism-demand combination appear in the table below. Construct the appropriate decision tree to analyze this problem. Use standard symbols for the tree. Analyze the tree to select the optimal decision for the manufacturer.

What is the EMV for Option 2 in the following decision table?

What is the expected value of perfect information of the following decision table?

Identify, in order, the six steps of analytical decision making.

Define expected monetary value (EMV).

What is the EMV for Option 1 in the following decision table?

A(n) __________ is an occurrence or situation over which the decision maker has little or no control.

Which technique results in an optimistic decision? Why?

Bratt's Bed and Breakfast, in a small historic New England town, must decide how to subdivide (remodel) the large old home that will become their inn. There are three alternatives: Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults. Option B would modernize only the second floor; the results would be six suites, four for two to four adults, and two for two adults only. Option C (the status quo option) leaves all walls intact. In this case, there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths. Below are the details of profit and demand patterns that will accompany each option. Which option has the highest expected value?

The first step, and a key element, in the decision-making process is to

The expected value with perfect information assumes that all states of nature are equally likely.

A toy manufacturer has three different mechanisms that can be installed in a doll that it sells. The different mechanisms have three different setup costs (overheads) and variable costs and, therefore, the profit from the dolls is dependent on the volume of sales. The anticipated payoffs are as follows. a. What is the EMV of each decision alternative? b. Which action should be selected? c. What is the expected value with perfect information? d. What is the expected value of perfect information?

A problem that involves a sequence of decisions

Suppose a manufacturing plant is considering three options for expansion. The first one is to expand into a new plant (large) , the second to add on third-shift to the daily schedule (medium) , and the third to do nothing (small) . There are three possibilities for demand. These are high, medium, and low with each having an equal likelihood of occurring. Suppose that the profits for the expansion plans are as follows (respective to high, medium, low demand). The large expansion profits are $100000, $10000, -$10000, the medium expansion choice $40000, $40000, $5000 and the small expansion choice $15000, $15000, $15000. Calculate the EMV of each choice. Which of the expansion plans should the manager choose?

Which of the following is not considered a step in the decision-making process?

The last step in the analytic decision process clearly defines the problem and the factors that influence it.

Explain the graphical shapes used in decision tree analysis.

Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort. The sale of Sno-Cones is highly dependent upon his location and upon the weather. At the resort, he will profit $120 per day in fair weather, $10 per day in bad weather. At home, he will profit $70 in fair weather, $55 in bad weather. Assume that on any particular day, the weather service suggests a 40% chance of foul weather. a. Construct Earl's decision tree. b. What decision is recommended by the expected value criterion?

The following decision tree has how many state of nature nodes

When solving decision trees, what phrase represents the act of dropping an alternative from consideration because it is less favorable than another available option?