Exam 4: Decision Analysis

Circular nodes in a decision tree indicate that it would be incorrect to choose a path from the node.

Dollar Department Stores has received an offer from Harris Diamonds to purchase Dollar's 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?

EVPI is always greater than or equal to EVSI.

The expected value approach is more appropriate for a one-time decision than a repetitive decision.

A payoff

A payoff table is given as a.What decision should be made by the optimistic decision maker? b.What decision should be made by the conservative decision maker? c.What decision should be made under minimax regret? d.If the probabilities of s₁,s₂,and s₃ are .2,.4,and .4,respectively,then what decision should be made under expected value? e.What is the EVPI?

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

A decision maker has developed the following decision tree.How sensitive is the choice between N and P to the probabilities of states of nature U and V? Topic: Sensitivity analysis