Exam 21: Decision-Making Tools

What is the expected value with perfect information of the following decision table? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~{ \text { States of Nature } } \\ \begin{array} { | l | c | c | } \hline \text { Alternatives } & \mathrm { S } _ { 1 } & \mathrm {~S} _ { 2 } \\ \hline \mathrm { p } & .4 & .6 \\ \hline \text { Option 1 } & 10,000 & 30,000 \\ \hline \text { Option 2 } & 5,000 & 45,000 \\ \hline \text { Option 3 } & -4,000 & 60,000 \\ \hline \end{array}

What is the expected value with perfect information in the following decision table? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~{ \text { States of Nature } } \\ \begin{array} { | l | c | c | } \hline \text { Alternatives } & \mathrm { S } _ { 1 } & \mathrm {~S} _ { 2 } \\ \hline \mathrm { p } & .6 & .4 \\ \hline \text { Option 1 } & 200 & 300 \\ \hline \text { Option } 2 & 50 & 350 \\ \hline \end{array}

What is the EMV for Option 1 in the following decision table? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~{ \text { States of Nature } } \\ \begin{array} { | l | c | c | } \hline \text { Alternatives } & \mathrm { S } _ { 1 } & \mathrm {~S} _ { 2 } \\ \hline \mathrm { p } & .3 & .7 \\ \hline \text { Option 1 } & 15,000 & 20,000 \\ \hline \text { Option 2 } & 10,000 & 30,000 \\ \hline \end{array}

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. Demand Wind-up action Pneumatic action Electronic action Light \ 250,000 \ 90,000 -\ 100,000 Moderate 400,000 440,000 400,000 Heavy 650,000 740,000 780,000 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.

The difference between the expected payoff under perfect information and the maximum expected payoff under risk is

A primary advantage of decision trees compared to decision tables is that decision trees

In a decision tree, a square symbol represents a state of nature node.

Analytic decision making is based on logic and considers all available data and possible alternatives.

The expected value with perfect information is

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 E 50 50 70 60 Alternative 30 50 80 130 Alternative G 70 80 70 60 Alternative -140 -10 150 220 Using the criterion of expected monetary value, which production alternative should be chosen?

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

Explain the graphical shapes used in decision tree analysis.

The last step of the decision-making process is to

In the context of decision-making, define alternative.

The construction manager for Acme Construction, Inc. must decide whether to build single family homes, apartments, or condominiums. This is not a product-mix problem, but an all-or nothing decision. He will hire workers and rent equipment appropriate for one action only. He estimates annual profits (in thousands of dollars) will vary with population trends as follows: Dwelling type Population steady Single family \ 100 \ 90 \ 70 Apartments 50 170 90 Condominiums -20 100 220 a. If he uses the maximin criterion, which type of dwellings will he choose to build? Show your supporting calculations. b. If he uses the equally likely criterion, which kind of dwellings will he choose to build? Show your supporting calculations. c. If the construction manager were an optimist, what criterion would he choose? What would be the choice of dwelling for that criterion? Show your supporting calculations.

What is the EMV for Option 2 in the following decision table? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~{ \text { States of Nature } } \\ \begin{array} { | l | c | c | } \hline \text { Alternatives } & \mathrm { S } _ { 1 } & \mathrm {~S} _ { 2 } \\ \hline \mathrm { p } & .3 & .7 \\ \hline \text { Option 1 } & 15,000 & 20,000 \\ \hline \text { Option 2 } & 10,000 & 30,000 \\ \hline \end{array}

Which of the following isnot considered a step in the decision-making process?

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.

Identify and describe three methods used for decision making under conditions of uncertainty.

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