Exam 19: Appendix: Decision Analysis

Describe how the following criteria are applied to a decision problem in which the payoff is cost. a.Minimin b.Minimax c.Minimax regret

Opportunity loss or ill-feeling that people often have after making a nonoptimal decision is best related to _____.

Jumbo James sells hotdogs out of a cart for $3.00 each. The cost to purchase and prepare the hotdog is $1.15 each. James operates the small business with very few capital assets and has no place to store unsold hotdogs. For this reason, every evening he sells the unsold hotdogs to a local homeless shelter for $0.50 each. Jumbo James will choose one of the following options as a standard stocking plan: d₁ = 100; d₂ = 150; or d₃ = 200 hotdogs. On any weekday, the demand for hotdogs and the probability of selling them is estimated as follows: Demand Per Day Probability 100 0.50 200 0.30 300 0.20 a. Determine the expected value if Jumbo James stocks 200 hotdogs every day. b. Determine the expected value if Jumbo James decides to stock 150 hotdogs every day.

In what type of situation would the expected value criterion be useful? In what type of situation would it not be useful?

Differentiate between uncertainty and risk.

An aggressive or risk-taking approach to one-time decisions without event probabilities is called maximin.

Risk is a form of uncertainty associated with an unexpected good.

The following table shows cost payoffs for four decision variables and four states of nature. 16 8 15 4 12 12 10 6 10 12 16 10 9 14 20 12 a. Which decision variable would be selected using minimin criteria? b. Which decision variable would be selected using minimax? c. Which decision variable would be selected using minimax-regret criteria. d. Suppose the decision maker assigns the probability for S₁ = 0.10; S₂ = 0.25; S₃ = 0.45; and S₄ = 0.20, which decision variable would be selected using the expected value criterion?

A paint company has three sources for buying bright red pigment for their paints: Vietnam, Taiwan, or Thailand. Unfortunately, the pigment is made from a bush whose annual growth is heavily dependent upon the amount of rainfall during the growing season. The tables below show probabilities and prices for wet, dry, and normal growing seasons: Probabilities Wet Dry Normal Vietnam 0.5 0.2 0.3 Taiwan 0.6 0.3 0.1 Thailand 0.4 0.4 0? $\begin{array}{lccc}&&\text { Price/Pound (\$) }\\&\text { Wet }&\text { Dry } &\text { Normal }\\\text { Vietnam } & 0.95 & 1.10 & 1.00 \\\text { Taiwan } & 0.85 & 1.20 & .98 \\\text { Thailand } & 0.90 & 1.5 & 1.05\end{array}$ a. Using decision tree analysis, what is the expected value (price) for Thailand? b. What country should the company select, and what is the expected value (price) associated with it?

_____ represent a future outcome that can occur after a decision is made that are not under the control of the decision maker.

Explain the concept of expected value of perfect information (EVPI). How does it help a decision maker?

A chemical company is trying to decide whether to build a pilot plant now for a new chemical process or to build the full plant now. If they build a pilot plant now, they could expand it later to a full plant or license the plant to another company. It would cost them $2 million to build the pilot plant and another $2 million later to expand it. If they build the full plant now it would cost $3.5 million to construct. The returns they expect to get from the full production plant depend upon the market.They estimate there is a 60% chance the market will be robust, a 30% chance it will remain stable, and a 10% chance it will become stagnant. The returns are estimated to be $5 million if it is robust, $3 million if it is stable, and $1 million if it is stagnant.Before they expand the pilot plant, they plan to conduct a comprehensive study. Based on past experience, they expect the study to report a 60% chance of favorable outcome for expansion and a 40% unfavorable chance. In either case, they should decide whether to expand to a full plant or license the pilot plant. If the report is favorable and they license it, they expect to get $3 million. However, if the report is unfavorable and they license it, they will only get $1 million. a. Using decision tree analysis, what is the expected value for building the full plant now? b. Using decision tree analysis, what is the value of the decision on expanding the pilot plant assuming the report is favorable? c. What should the company do, and what is the expected value of that decision?

Uncertainty refers to not knowing what will happen in the future. Which of the following LEAST applies to uncertainty?

Irrespective of its quality, the expected value of perfect information represents the maximum amount a company should be willing to pay for any information about events.

The decision criterion, for a one-time decision without event probabilities, which is neither aggressive nor conservative, is known as _____.

In the following profit table, d_i represents decision variables and S_i represents states of nature. 15.00 15.00 15.00 15.00 10.00 5.00 25.00 25.00 35.00 0 40.00 60.00 60.00 20.00 50.00 90.00 a. If management assigns probabilities as follows: S₁ = 0.15; S₂ = 0.25; S₃ = 0.40; and S₄ = 0.20, determine the expected value for d₂. b. Determine the expected value for d₃. c. Assuming the largest expected value for a decision variable is 24.00; determine the value of perfect information.

Explain the structure and purpose of a decision tree.

A conservative or risk-averse approach to one-time decisions without event probabilities is known as _____.

Decision problems can be depicted graphically using the expected-value approach.

Which of the following statements is TRUE of expected value of perfect information (EVPI)?