Exam 19: Introduction to Decision Analysis

In conducting sensitivity analysis for a probability in a decision tree,where there are only two alternatives,you solve to find the probability where the expected values of the two alternatives are equal to one another.

The minimax regret criterion can be thought of as; the decision maker is trying to minimize how much he/she might regret the decision that was made.

Making decisions under certainty means that the state of nature is known prior to choosing an alternative so the optimal decision can be chosen which will produce the best outcome.

Assume that you have a riding lawn mower that is in need of repairs.You can choose to repair or replace it.You are interested in your net cost over the next two years.If you choose to repair,it will cost $300 and there is a 50/50 chance of whether or not it will need additional repairs within the next two years.If it does need additional repairs,there is a 40 percent chance of needing another $400 of repairs,and a 60 percent chance of needing another $200 of repairs.At the end of the two years you estimate that the repaired mower would be worthless. If you choose to replace the mower by trading in the old mower,the cost after deducting the trade in value is $1500.At the end of the two years you estimate there is a 75 percent chance you could resell it for $1000,and a 25 percent chance that you can resell it for $1300. After constructing the decision tree and folding it back you should choose to repair the mower because the expected value is a cost of $140.

The complexity of a decision is affected by the number of alternatives,the number of possible outcomes,and the general level of uncertainty.

A decision tree is shown below where the expected value of alternative 1 is known to be 400. After folding back the decision tree,you conclude that you should choose alternative 1 over alternative 2.

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. The opportunity loss for making few donuts (A₁)and having low demand (S₃)is:

The expected value of perfect information (EVPI)is the minimum amount a manager would expect to pay to obtain perfect information.

When using the expected value criterion,the expected value for a given alternative is:

Good decisions always result in good outcomes.

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. It estimates the following probabilities for the respective levels of demand. What is the expected value of making many donuts (A₃)?

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. The opportunity loss for Location 1 and Good restaurant popularity is 150.

The term expected value refers to the exact value that the decision maker can expect to receive when a given alternative is chosen.

The first step in the minimax regret criterion is to construct the opportunity loss table.

Opportunity loss is the difference between the actual payoff that occurs for a decision and the optimal payoff for a given state of nature.

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. It estimates the following probabilities for the respective levels of demand. If on a given day the bakery knew in advance that demand was going to be high,then the payoff that day would be 350.

An investor has $1000 to invest and is considering the four alternatives shown below.How well each investment does depends on the state of the economy.The payoff table is shown below. If the investor chose stock A and the economy went into recession,what is the value of the opportunity loss?

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. The opportunity loss for making a medium number of donuts (A₂)and demand being high (S₁)is 100.

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Suppose that Julie estimates the following probabilities for each level of restaurant popularity. If Julie had perfect information,the expected payoff under certainty is 310.

Most business decisions are made in an environment of certainty.