Exam 18: Decision-Making Tools

Daily sales of bread by Salvador Monella's Baking Company follow the historical pattern shown in the table below. It costs the bakery 50 cents to produce a loaf of bread, which sells for 95 cents. Any bread unsold at the end of the day is sold to the parish jail for 25 cents per loaf. Construct the decision table of conditional payoffs. How many loaves should Sal bake each day in order to maximize contribution? Demand 400 500 600 700 800 Probability .20 .20 .40 .15 .05

Janice Boston owns a Sno-Cone business and lives 30 kms 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, $30 per day in foul weather. At home, he will profit $80 in fair weather, $40 in foul weather. Assume that on any particular day, the weather service suggests a 70% chance of fair weather. a. Construct Janice's payoff table. b. What decision is recommended by the expected value criterion? c. What is the EVPI?

The campus bookstore sells stadium blankets embroidered with the university crest. The blankets must be purchased in bundles of one dozen each. Each blanket in the bundle costs $65, and will sell for $90. Blankets unsold by graduation will be clearance priced at $20. The bookstore estimates that demand patterns will follow the table below. a. Build the decision table. b. What is the maximum expected value? c. How many bundles should be purchased? Demand level Probability 1 bundle 10\% 2 bundles 30\% 3 bundles 50\% 4 bundles 10\%

A decision-maker using the maximin criterion on the problem below would choose Alternative ________ because the maximum of the row minimums is ________. States of Nature 1 2 3 Alternative A 50 55 60 Alternative B 30 50 80 Alternative C 70 80 70 Alternative D -100 -10 140

What is the EMV for Option 2 in the following decision table? States of Nature Alternatives .3 .7 Option 1 15,000 20,000 Option 2 10,000 30,000

The campus bookstore sells highlighters that it purchases by the case. Cost per case, including shipping and handling, is $200. Revenue per case is $350. Any cases unsold will be discounted and sold at $175. The bookstore has estimated that demand will follow the pattern below Demand level Probability 10 cases 20\% 11 cases 20\% 12 cases 40\% 13 cases 15\% 14 cases 5\% a. Construct the bookstore's payoff table. b. How many cases should the bookstore stock in order to maximize profit? c. How would your answer differ if the clearance price were not $175 per case but $225 per case? (It is not necessary to re-solve the problem to answer this.)

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

The following decision tree has how many state of nature nodes?

Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. Develop a decision tree for this situation and indicate which type of truck he should select. States of Nature Alternatives Lower gas prices Gas prices unchanged Higher gas prices probability .3 .5 .2 Subcompact 16,000 19,000 21,000 Compact 15,000 20,000 22,000 Full size 24,000 19,000 6,000

A(n) ________ is a tabular means of analyzing decision alternatives and states of nature.

The EMV of a decision with three states of nature is $50. If the profit/value of A is 1/3 of B and B is 1/3 of C, determine the profit from A if B and C have an equal chance of occurring that combined is twice the chance of A occurring.

The highest value for the equally likely criterion is ________; this occurs with alternative ________. States of Nature Alternatives Option 1 \ 10,000 \ 30,000 Option 2 \ 5,000 \ 45,000 Option 3 -\ 4,000 \ 60,000

Doing nothing would yield how much profit if favorable market conditions prevail according to the following decision table? Alternative Favorable market Unfavorable Market Do Nothing \ 28,000 -\ 9,000

An operations manager's staff has compiled the information below for four manufacturing alternatives (E, F, G, and H) that vary by production technology and the capacity of the machinery. All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. Forecasts indicate that there is a 0.1 probability of acceptance level 1, 0.2 chance of acceptance level 2, 0.4 chance of acceptance level 3, and 0.3 change of acceptance level 4. States of Nature 1 2 3 4 Alternative 50 50 70 60 Alternative 30 50 80 130 Alternative 70 80 70 60 Alternative -140 -10 150 220 Using the criterion of expected monetary value, which production alternative should be chosen?

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. Profit Light Medium Heavy Probability 0.23 0.37 0.4 Wind-up 1000 700 1150 Pneumatic 500 800 1350 Electrical 700 900 1100 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?

The maximax criterion of decision making requires that all decision alternatives have an equal probability of occurrence.

________ is the expected payout or value of a variable that has different possible states of nature, each with an associated probability.

Explain the graphical shapes used in decision tree analysis.

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

What is the EMV for Option 1 in the following decision table? States of Nature Alternatives .6 .4 Option 1 200 300 Option 2 50 350