Exam 19: Decision Theory

Scenario A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively. -Which decision has the minimum expected opportunity loss?

The maximum criterion specifies that we select the decision alternative having the lowest maximum payoff.

Another term for regret is ______________________________.

Scenario A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively. -What decision will be made to maximize expected payoff?

State of Nature The following table displays the payoffs (in thousands of dollars)for five different decision alternatives under three possible states of nature: State of Nature Alternative I Prob. = II Prob. = III Prob. = A \ 110 \ 80 -\ 20 B \ 90 \ 85 \ 10 C \ 45 \ 65 \ 45 D \ 30 \ 60 \ 65 E \ 10 \ 25 \ 70 -Calculate the expected value of perfect information (EVPI)in thousands of dollars. ____________________ thousand

Economy An investor has constructed the following payoff table for his profit in thousands of dollars. The state of the economy will be Invest in company Weak Moderate Strong -\ 45 \ 35 \ 65 -\ 25 \ 25 \ 50 \ 29 \ 33 \ 35 -What is the most the investor should be willing to pay for perfect information about the future state of the economy? ____________________ thousand

Economy An investor has constructed the following payoff table for his profit in thousands of dollars. The state of the economy will be Invest in company Weak Moderate Strong -\ 45 \ 35 \ 65 -\ 25 \ 25 \ 50 \ 29 \ 33 \ 35 -Using the opportunity loss approach,which alternative will be selected,and what is its expected opportunity loss? EOL is ____________________ thousand

Scenario A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively. -What decision will be made using the maximin criterion?

Scenario A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively. -What is the most the company should be willing to pay for a research study designed to reduce its uncertainty about media and legal developments concerning packaging? ____________________ million

What is the most important difference between Bayesian and non-Bayesian decision criteria?

State of Nature The following table displays the payoffs (in thousands of dollars)for five different decision alternatives under three possible states of nature: State of Nature Alternative I Prob. = II Prob. = III Prob. = A \ 110 \ 80 -\ 20 B \ 90 \ 85 \ 10 C \ 45 \ 65 \ 45 D \ 30 \ 60 \ 65 E \ 10 \ 25 \ 70 -Based on the expected opportunity loss criterion,what is the best decision alternative?

A California mango grower is considering the installation of a heating system to protect his crop in the event of frost during the coming winter.What would be the rows and columns of a payoff table applicable to this decision? Rows: Columns:

Tee shirts Tee Shirts Unlimited is providing shirts for an upcoming sports tournament.They assume demand will be either 2000,3000,4000,or 5000 shirts and they need to decide whether to produce 2000,3000,4000,or 5000 shirts.The payoff for each production/demand combination is shown in the table below. PAYOFFE Demand Altematives \ 10,000 \ 10,000 \ 10,000 \ 10,000 \ \ 15,000 \ 15,000 \ 15,000 -\ 4,000 \ \ 20,000 \ 20,000 -\ 11,000 \ 1,000 \ 13,000 \ 25,000 -The probabilities for demand levels 2000,3000,4000,and 5000 have been estimated to be 20%,40%,15%,and 25% respectively.Which is the expected value of perfect information?

Market Condition Three different designs are being considered for a new refrigerator,and profits will depend on the combination of the refrigerator design and market condition.The following payoff table summarizes the decision situation,with amounts in millions of dollars. Market Condition Design I II III 27 16 8 17 18 20 7 12 42 -What decision will be made using the minimax regret criterion?

In what way is the lowest of the expected opportunity losses related to the expected value of perfect information?

What is the most the firm would be willing to pay for a research study designed to reduce its uncertainty about market conditions? ____________________ million

Canoe rentals John's Canoe Rentals leases canoes each day from a supplier and rents them to customers who use them to float down the Delaware River.Each day,John can lease 10,20,or 30 canoes from his supplier.John assumes daily demand will be either 10,20,or 30 canoes.The payoff table for each lease/demand combination is shown below. PAYoFFE Demand Altemitives \ 140 \ 140 \ 140 -\ 20 \ 280 \ 280 30 -\ 180 \ 120 \ 420 -How many canoes should be leased using the maximax criterion?

The manager of a grocery store pays 60 cents for each rose and sells them for $1.50 each.Roses left at the end of the day are discarded.The daily demand can be approximated by a normal distribution having a mean of 250 and a standard deviation of 40.To maximize his expected profit,how many roses should the manager buy before the market opens each day? ____________________ roses

If the probability of the competitor setting their price High,Medium,and Low is 40%,25%,and 35% respectively,what is the expected value of perfect information?

The manager of a small local airport must extend a runway if business jets are to be accommodated.However,the residents living close to the airport are already complaining to the city council about the volume and noise of existing air traffic at the facility.Identify the decision alternatives and the possible states of nature that might occur after the decision is made.