Exam 4: Decision Analysis

Which of the methods for decision making without probabilities best protects the decision maker from undesirable results?

Transrail is bidding on a project that it figures will cost $400,000 to perform.Using a 25% markup,it will charge $500,000,netting a profit of $100,000.However,it has been learned that another company,Rail Freight,is also considering bidding on the project.If Rail Freight does submit a bid,it figures to be a bid of about $470,000.Transrail really wants this project and is considering a bid with only a 15% markup to $460,000 to ensure winning regardless of whether or not Rail Freight submits a bid. a.Prepare a profit payoff table from Transrail's point of view. b.What decision would be made if Transrail were conservative? c.If Rail Freight is known to submit bids on only 25% of the projects it considers,what decision should Transrail make? d.Given the information in (c),how much would a corporate spy be worth to Transrail to find out if Rail Freight will bid?

For a minimization problem,the optimistic approach is often referred to as the

Sample information with an efficiency rating of 100% is perfect information.

Risk analysis helps the decision maker recognize the difference between the expected value of a decision alternative and the payoff that may actually occur.

A decision strategy is a sequence of decisions and chance outcomes,where the decisions chosen depend on the yet to be determined outcomes of chance events.

For a maximization problem,the conservative approach is often referred to as the

East West Distributing is in the process of trying to determine where they should schedule next year's production of a popular line of kitchen utensils that they distribute.Manufacturers in four different countries have submitted bids to East West.However,a pending trade bill in Congress will greatly affect the cost to East West due to proposed tariffs,favorable trading status,etc. After careful analysis,East West has determined the following cost breakdown for the four manufacturers (in $1,000's)based on whether or not the trade bill passes: a.If East West estimates that there is a 40% chance of the bill passing,which country should they choose for manufacturing? b.Over what range of values for the "bill passing" will the solution in part (a)remain optimal?

Dollar Department Stores has just acquired the chain of Wenthrope and Sons Custom Jewelers.Dollar has received an offer from Harris Diamonds to purchase the Wenthrope store on Grove Street for $120,000.Dollar has determined probability estimates of the store's future profitability,based on economic outcomes,as: P($80,000)= .2,P($100,000)= .3,P($120,000)= .1,and P($140,000)= .4. a.Should Dollar sell the store on Grove Street? b.What is the EVPI? c.Dollar can have an economic forecast performed,costing $10,000,that produces indicators I₁ and I₂,for which P(I_{1SYMBOL 189 \f "Symbol"}80,000)= .1;P(I_{1SYMBOL 189 \f "Symbol"}100,000)= .2;P(I_{1SYMBOL 189 \f "Symbol"}120,000)= .6;P(I_{1SYMBOL 189 \f "Symbol"}140,000)= .3.Should Dollar purchase the forecast?

Expected value is the sum of the weighted payoff possibilities at a circular node in a decision tree.

The expected value of sample information can never be less than the expected value of perfect information.

If sample information is obtained,the result of the sample information will be either positive or negative.No matter which result occurs,the choice to select option A or option B exists.And no matter which option is chosen,the eventual outcome will be good or poor.Complete the table.

States of nature should be defined so that one and only one will actually occur.

Sensitivity analysis considers

If p is the probability of Event 1 and (1-p)is the probability of Event 2,for what values of p would you choose A? B? C? Values in the table are payoffs.

Fold back this decision tree.Clearly state the decision strategy you determine.

The efficiency of sample information is

Jim has been employed at Gold Key Realty at a salary of $2,000 per month during the past year.Because Jim is considered to be a top salesman,the manager of Gold Key is offering him one of three salary plans for the next year: (1)a 25% raise to $2,500 per month; (2)a base salary of $1,000 plus $600 per house sold;or, (3)a straight commission of $1,000 per house sold.Over the past year,Jim has sold up to 6 homes in a month. a.Compute the monthly salary payoff table for Jim. b.For this payoff table find Jim's optimal decision using: (1)the conservative approach, (2)minimax regret approach. c.Suppose that during the past year the following is Jim's distribution of home sales.If one assumes that this a typical distribution for Jim's monthly sales,which salary plan should Jim select? Home Sales Number of Months 0 1 1 2 2 1 3 2 4 1 5 3 6 2

EVPI equals the expected regret associated with the minimax decision.

If P(high)= .3,P(low)= .7,P(favorable | high)= .9,and P(unfavorable | low)= .6,then P(favorable)=