Exam 17: Decision-Making Tools

A retailer is deciding how many units of a certain product to stock. The historical probability distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product costs $8 per unit and sells for $33 per unit. What is the largest conditional value (profit) in the entire payoff table for this scenario?

Which of the following options has the maximum EMV?

The expected value with perfect information:

For the following decision table, the highest value for the equally likely criterion is ________; this occurs with alternative ________.

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

The last step of the decision-making process is to:

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

Decision trees and decision tables can both solve problems requiring a single decision, but decision trees are the preferred method when a sequence of decisions is involved.

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 50% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 30% 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. Calculate the expected monetary value for each decision alternative. Which decision yields the highest EMV?

How is the expected value of perfect information (EVPI) found?

In the context of decision making, define a state of nature.

Explain the symbols used in decision tree analysis.

Expected monetary value is most appropriate for problem solving that takes place:

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?

The expected value of perfect information is the same as the expected value with perfect information.

A plant manager wants to know how much she should be willing to pay for perfect market research. Currently there are two states of nature facing her decision to expand or do nothing. Under favorable market conditions the manager would make $100,000 for the large plant and $5,000 for the small plant. Under unfavorable market conditions the large plant would lose $80,000 and the small plant would make $0. If the two states of nature are equally likely, how much should she pay for perfect information?

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

The last step in the analytic decision process is to select the best alternative.

A problem that involves a sequence of decisions:

The expected monetary value of a decision alternative is the sum of all possible payoffs from the alternative, each weighted by the probability of that payoff occurring.