Exam 3: Decision Analysis

The following is a payoff table. What decision should be made based on the minimax regret criterion?

Orders for clothing from a particular manufacturer for this year's Christmas shopping season must be placed in February.The cost per unit for a particular dress is $20 while the anticipated selling price is $50.Demand is projected to be 50,60,or 70 units.There is a 40 percent chance that demand will be 50 units,a 50 percent chance that demand will be 60 units,and a 10 percent chance that demand will be 70 units.The company believes that any leftover goods will have to be scrapped.How many units should be ordered in February?

A decision table is sometimes called a payout table.

Mark M.Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail).He is considering opening a competing bookstore near the campus,and he has begun an analysis of the situation.There are two possible sites under consideration.One is relatively small,while the other is large.If he opens at Site 1 and demand is good,he will generate a profit of $50,000.If demand is low,he will lose $10,000.If he opens at Site 2 and demand is high,he will generate a profit of $80,000,but he will lose $30,000 if demand is low.He also has the option of not opening at either site.He believes that there is a 50 percent chance that demand will be high.A market research study will cost $5,000.The probability of a good demand given a favorable study is 0.8.The probability of a good demand given an unfavorable study is 0.1.There is a 60 percent chance that the study will be favorable. (a)Should Mark use the study? Why? (b)If the study is done and the results are favorable,what would Mark's expected profit be?

Another name for a decision table is a

Describe the utility curve of a risk seeker.

The following is a payoff table. What decision should be made based on the minimax regret criterion?

Utility values typically range from

An analytic and systematic approach to the study of decision making is referred to as

In decision making under ________,there are several possible outcomes for each alternative,and the decision maker does not know the probabilities of the various outcomes.

Utility theory may help the decision maker include the impact of qualitative factors that are difficult to include in the EMV model.

A company is considering expansion of its current facility to meet increasing demand.A major expansion would cost $500,000,while a minor expansion would cost $200,000.If demand is high in the future,the major expansion would result in an additional profit of $800,000,but if demand is low,then there would be a loss of $500,000.If demand is high,the minor expansion will result in an increase in profits of $200,000,but if demand is low,then there is a loss of $100,000.The company has the option of not expanding.For what probability of a high demand will the company be indifferent between the two expansion alternatives?

Mark M.Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail).He is considering opening a competing bookstore near the campus,and he has begun an analysis of the situation.There are two possible sites under consideration.One is relatively small while the other is large.If he opens at Site 1 and demand is good,he will generate a profit of $50,000.If demand is low,he will lose $10,000.If he opens at Site 2 and demand is high he will generate a profit of $80,000,but he will lose $30,000 if demand is low.He also has decided that he will open at one of these sites.He believes that there is a 60 percent chance that demand will be high.He assigns the following utilities to the different profits: U(50,000)= 0.72 U(-10,000)= 0.22 U(80,000)= 1 U(-30,000)= 0 Using expected utility theory,what should Mark do?

Robert Weed is considering purchasing life insurance.He must pay a $180 premium for a $100,000 life insurance policy.If he dies this year,his beneficiary will receive $100,000.If he does not die this year,the insurance company pays nothing and Robert must consider paying another premium next year.Based on actuarial tables,there is a 0.001 probability that Robert will die this year.If Robert wishes to maximize his EMV,he would not buy the policy if the EMV were negative for him.He has determined that the EMV is,negative for him,but decides to purchase the insurance anyway.Why?

A market research survey is available for $10,000.Using a decision tree analysis,it is found that the expected monetary value with the survey is $75,000.The expected monetary value with no survey is $62,000.What is the expected value of sample information?

Any problem that can be represented in a decision tree can be easily portrayed in a decision table.

The optimistic decision criterion is the criterion of

The ABC Co.is considering a new consumer product.They have no idea whether or not the XYZ Co.will come out with a competitive product.If ABC adds an assembly line for the product and XYZ does not follow with a competitive product,their expected profit is $40,000;if they add an assembly line and XYZ does follow,they still expect a $10,000 profit.If ABC adds a new plant addition and XYZ does not produce a competitive product,they expect a profit of $600,000;if XYZ does compete for this market,ABC expects a loss of $100,000. Calculate Hurwicz's criterion of realism using αs of a.0.7,b.0.3,and c.0.1.

The decision making criterion of realism only applies to maximizing expected payoff.

A rational decision maker must choose between two alternatives.Alternative 1 has a higher EMV than Alternative 2,but the decision maker chooses Alternative 2.What might explain why this occurs?