Exam 8: Decision Analysis

Opportunity loss is the difference between the optimal payoff and the actual payoff received.

Use this information to answer the following questions. A bakery must decide how many pies to prepare for the upcoming weekend.The bakery has the option to make 50,100,or 150 pies.Assume that demand for the pies can be 50,100,or 150.Each pie costs $5 to make and sells for $7.Unsold pies are donated to a nearby charity center.Assume that there is no opportunity cost for lost sales. -Refer to the information above.Assume that the bakery (see problem 7)has obtained the following probability information regarding demand for the pies: P(50)= 0.3,P(100)= 0.5,and P(150)= 0.2. a.Develop a decision tree for this problem. b.Analyze the decision tree and determine which alternative should be chosen. c.Using the expected opportunity loss (EOL)criterion,which alternative should be chosen?

The maximin criterion is an optimistic approach to decision making.

Use this information to answer the following questions. Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3. -Refer to the payoff table.Using the maximin criterion,what would be the highest expected payoff?

Suppose that the utility function for a decision maker is represented as follows: U(x)= $\sqrt { x }$ .The potential payoffs that are possible are illustrated below. Payoff (x) $100 $200 $300 $400 $500 $600 $700 $800 $900 $1000 Convert these payoffs into utility values using the above function.Plot the utility curve and determine whether the decision maker is a risk avoider,risk indifferent,or a risk seeker.

If the coefficient of realism alpha equals 1,then the criterion of realism will yield the same result as the maximax criterion.

Decision trees are typically analyzed from right to left.

Which of the following statements the use of decision trees in multi-stage decision making problems is False?

Use this information to answer the following questions. A bakery must decide how many pies to prepare for the upcoming weekend.The bakery has the option to make 50,100,or 150 pies.Assume that demand for the pies can be 50,100,or 150.Each pie costs $5 to make and sells for $7.Unsold pies are donated to a nearby charity center.Assume that there is no opportunity cost for lost sales. -Refer to the information above.Assume that based on historical bids with the defense contractor,the plant manager believes that there is a 65% chance that the bid will be accepted and a 35% chance that the bid will be rejected. a.Develop a decision tree for this problem. b.Analyze the decision tree and determine which alternative should be chosen. c.Using the expected opportunity loss (EOL)criterion,which alternative should be chosen?

Use this information to answer the following questions. Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3. -Refer to the payoff table.Using the maximax criterion,what would be the highest expected payoff?

Use this information to answer the following questions. A plant manager is considering buying additional stamping machines to accommodate increasing demand.The alternatives are to buy 1 machine,2 machines,or 3 machines.The profits realized under each alternative are a function of whether their bid for a recent defense contract is accepted or not.The payoff table below illustrates the profits realized (in $000's)based on the different scenarios faced by the manager. Alternative Bid Accepted Bid Rejected Buy 1 machine \ 10 \ 5 Buy 2 machines \ 30 \ 4 Buy 3 machines \ 40 \ 2 -Refer to the information above.Assume that ABC Inc.has hired a marketing research firm that provided additional information regarding next year's demand.Suppose that the probabilities of low and high demand are assessed as follows: P(Low)= 0.4 and P(High)= 0.6. a.Develop a decision tree for this problem. b.Analyze the decision tree and determine which alternative should be chosen. c.Using the expected opportunity loss (EOL)criterion,which alternative should be chosen?

Determining the worst payoff for each alternative and choosing the alternative with the "best of the worst" is the approach called:

A company must decide whether to build a small,medium,or large grocery store.Marketing research findings indicate a 0.35 probability that demand will be low and a 0.65 probability that demand will be high.If the company builds a small grocery store and demand is low,the net present value will be $150,000.If demand is high the company can buy its additional grocery needs from a wholesaler and realize a net present value of $100,000 or expand and realize a net present value of $120,000.If the company builds a medium grocery store and demand is low,the net present value will be $175,000;if demand turns to be high the company could do nothing and realize a net present value of $100,000,or expand and realize a net present value of $135,000.If the firm builds a large grocery store and demand is low,the net present value will be $50,000;if demand turns out to be high the net present value will be $250,000. a.Develop a decision tree for this problem. b.Analyze the decision tree and determine which alternative should be chosen.

Use this information to answer the following questions. AAA auto supply store sells snow tires which are ordered every Friday to meet next week's demand.The sales price for the most popular size is $50 per tire and its cost for AAA is $35.If too many tires are ordered AAA incurs an inventory carrying cost of $2 per tire.If AAA is out of stock,it forgoes the profits from missed sales.AAA has the option to order 100,150,or 200 tires to meet next week's demand which can be either 100,150,or 200 tires. -Refer to the information above.Based on its historical demand distribution,assume that AAA Inc.has determined the following probability information: P(100)= 0.4,P(150)= 0.3,and P(200)= 0.3. a.Develop a decision tree for this problem. b.Analyze the decision tree and determine which alternative should be chosen. c.Using the expected opportunity loss (EOL)criterion,which alternative should be chosen?

Bayes' theorem allows decision makers to incorporate additional information to revise their probability estimates of various outcomes.

Suppose that the utility function for a decision maker is represented as follows: U(x)= 2x.The potential payoffs that are possible are illustrated below. Payoff (x) $100 $200 $300 $400 $500 $600 $700 $800 $900 $1000 Convert these payoffs into utility values using the above function.Plot the utility curve and determine whether the decision maker is a risk avoider,risk indifferent,or a risk seeker.

Use this information to answer the following questions. AAA auto supply store sells snow tires which are ordered every Friday to meet next week's demand.The sales price for the most popular size is $50 per tire and its cost for AAA is $35.If too many tires are ordered AAA incurs an inventory carrying cost of $2 per tire.If AAA is out of stock,it forgoes the profits from missed sales.AAA has the option to order 100,150,or 200 tires to meet next week's demand which can be either 100,150,or 200 tires. -Refer to the information above. a.Which alternative should be chosen based on the maximax criterion? b.Which alternative should be chosen based on the maximin criterion? c.Which alternative should be chosen based on the Lapalce criterion? d.Which alternative should be chosen based on criterion of realism with alpha = 0.7? e.Which alternative should be chosen based on the minimax regret criterion?

Use this information to answer the following questions. Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3. -Refer to the payoff table.What is the expected value of perfect information (EVPI)? Assume P(S1)= 0.5 and P(S2)= 0.25.

A toy store is considering expanding its capacity to meet a growing demand for its products.The options faced by management are to build a new store,expand the existing store,or do nothing.A marketing research firm has projected a 50% probability of a high demand for the toy market,a 30% probability of a low demand,and a 20% probability of an unchanged demand.The following estimates of annual returns (in $000's)are as follows: Demand Alternative High Low Unchanged Build new store \ 60 \ 25 \ 40 Expand existing store \ 45 \ 15 \ 25 Do nothing \ 10 \ 4 \ 6 a.Develop a decision tree for this problem. b.Analyze the decision tree and determine which alternative should be chosen.

Use this information to answer the following questions. Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3. -Refer to the payoff table.Using the minimax regret criterion,which alternative would you choose?