Exam 19: Appendix: Decision Analysis

Which of the following is NOT a similarity between the elements of a decision problem and a decision tree?

A Pacific Northwest lumber company is considering the expansion of one of its mills. The question is whether to do it now, or wait for one year and re?consider. If they expand now, the major factors of importance are the state of the economy and the level of interest rates. The combination of these two factors results in five possible situations. If they do not expand now, only the state of the economy is important, and three conditions characterize the possibilities. The following table summarizes the situation: Expand Probabilities Revenues very favorable 0.2 \ 80,000 favorable 0.2 \ 60,000 neutral 0.1 \ 20,000 unfavorable 0.3 -\ 20,000 very unfavorable 0.2 -\ 30,000 Don't expand expansion 0.2 \ 50,000 steady 0.5 \ 30,000 contraction 0.3 \ 10,000 a. Using decision tree analysis, what is the expected value (EV) for expanding? b. Using decision tree analysis, what is the expected value (EV) for not expanding? c. Based on expected value (EV), what should the company's decision(s) be?

With some modification, the decision rules for one-time decisions without event probabilities can be applied to situations where the payoff is cost.

In a decision tree, event nodes are denoted by _____.