Exam 23: Work Measurement, Learning Curves, and Standards

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

Describe how the following criteria are applied to a decision problem in which the object is maximization. a.Maximax b.Maximin c.Minimax regrets

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

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: very favorable .2 \ 80,000 favorable .2 \ 60,000 neutral .1 \ 20,000 unfavorable .3 -\ 20,000 very unfavorable .2 -\ 30,000 expansion .2 \ 50,000 steady .5 \ 30,000 contraction 3 \ 10,000 a. Using decision tree analysis, what is the expected value for expanding? b. Using decision tree analysis, what is the expected value for not expanding? c. Based on expected value, what should the company's decisions) be?

A company is expanding its production capacity. The decision will depend upon whether the increase in demand is low, medium or high. The company's choices for expansion are small, medium, large or very large. The following table provides an estimate of profits over the next two years. Demand Values Decision Low Medium High Small Expansion ) \ 5,000 \ 10,000 \ 10,000 Medium Expansion ) \ 2,000 \ 12,000 \ 14,000 Large Expansion ) -0- \ 6,000 \ 13,000 Very Large Expansion ) -\ 5,000 \ 8,000 \ 20,000 a. Which decision variable would be picked using maximax? b. Which decision variable would be picked using maximin? c. Which decision variable would be picked using minimax regrets criteria? d. Suppose the decision-maker assigns the probability of low-demand as 0.2, medium-demand as 0.5 and high-demand as 0.3. Which decision variable would be picked using the expected value criterion?

Explain the structure and purpose of a decision tree.

The following table shows cost payoffs for four decision variables and four states of nature. 16 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. Remembering that the data represents cost, which decision variable would be selected using minimax? c. Remembering that the data represents cost, which decision variable would be selected using minimax-regrets 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 picked using the expected value criterion?

A decision-maker has decided to expand her operations and become more efficient. Decision variable d₁ is to do nothing; d₂ is a moderate expansion; and d₃ is a major expansion. a. Determine the expected value of d₂ if the states of nature are S₁ = 0.25; S₂ = 0.60; and S₃ = 0.15. b. Determine the expected value for d₃ if the states of nature are S₁ = 0.25; S₂ = 0.60; and S₃ = 0.15.

For decisions repeated over-and-over again, managers can choose those based upon the expected payoff that might occur.

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 stagnate. The returns are estimated to be $5 million if it is robust, $3 million if it is stable, and $1 million if it is stagnate. 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 will have to 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?

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

A numerical value associated with a decision coupled with some event is called a decision tree.

Discuss the five characteristics of management decisions when decision analysis techniques should be utilized.

A model that starts with the future-most point and moves toward the current time period is called a ____.

Regarding the concept of the expected value of perfect information,

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 Vietnam .5 .2 .3 Taiwan .6 .3 .1 Thailand 4 4 2 $\begin{array}{c}\text { Price/Pound \$) }\\\begin{array}{lccc}&\underline{\text { Wet}}&\underline{\text { Dry }}&\underline{\text { Normal }}\\\text { Vietnam } & .95 & 1.10 & 1.00 \\\text { Taiwan } & .85 & 1.20 & .98 \\\text { Thailand } & 90 & 1.15 & 1.05\end{array}\end{array}$ 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?

Given the following table, calculate the expected value of perfect information. Low Medium High Expected Demand Demand Demand Value Small \ 400 \ 400 \ 400 \ 400 Medium \ 100 \ 600 \ 600 \ 500 Large -\ 300 \ 300 \ 900 \ 450 Probability 0.20 0.35 0.45

Considering decision trees, which of the following statements is not correct?

Differentiate between uncertainty and risk.

The minimax regret approach is neither aggressive nor conservative.