Exam 13: Decision Analysis

East West Distributing is in the process of trying to determine where it should schedule next year's production of a popular line of kitchen utensils that it distributes.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 $1000s)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 it choose for manufacturing? b.Over what range of values for the "bill passing" will the solution in part (a)remain optimal? ​

Making a good decision

For the payoff table below,the decision maker will use P(s₁)= 0.15,P(s₂)= 0.5,and P(s₃)= 0.35.​ ​ a.What alternative would be chosen according to expected value? b.For a lottery having a payoff of 40,000 with probability p and -15,000 with probability (1 -p),the decision maker expressed the following indifference probabilities. c.What alternative would be chosen according to expected utility? ​

The table shows both prospective profits and losses for a company,depending on what decision is made and what state of nature occurs.Use the information to determine what the company should do.Show your work (regret table).​ ​ a.If an optimistic strategy is used. b.If a conservative strategy is used. c.If minimax regret is the strategy.

If P(high)= 0.3,P(low)= 0.7,P(favorable | high)= 0.9,and P(unfavorable | low)= 0.6,then P(favorable)=

States of nature

The decision alternative with the best expected monetary value will always be the most desirable decision.

Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy.The fire statistics indicate that in a given year the probability of property damage in a fire is as follows: ​ ​ a.If Burger Prince was risk neutral,how much would it be willing to pay for fire insurance? b.If Burger Prince has the utility values given below,approximately how much would it be willing to pay for fire insurance? ​ ​

To find the expected value of sample information (EVSI),

Chez Paul is contemplating either opening another restaurant or expanding its existing location.The payoff table for these two decisions is as follows: ​ ​ Paul has calculated the indifference probability for the lottery having a payoff of $160,000 with probability p and -$80,000 with probability (1 -p)as follows: ​ ​ a.Is Paul a risk avoider,a risk taker,or risk neutral? b.Suppose Paul has defined the utility of -$80,000 to be 0 and the utility of $160,000 to be 80.What would be the utility values for -$40,000,$20,000,and $100,000 based on the indifference probabilities? c.Suppose P(s₁)= 0.4,P(s₂)= 0.3,and P(s₃)= 0.3.Which decision should Paul make? Compare with the decision using the expected value approach. ​ ​

A decision tree

Which of the following methods for decision making best protects the decision maker from undesirable results?

Super Cola is considering the introduction of a new eight-oz.root beer.The probability that the root beer will be a success is believed to equal 0.6.The payoff table is as follows: ​ ​ Company management has determined the following utility values: ​ ​ a.Is the company a risk taker,risk averse,or risk neutral? b.What is Super Cola's optimal decision? ​

When the decision maker prefers a guaranteed payoff value that is smaller than the expected value of the lottery,the decision maker is a(n)

Regret is the difference between the payoff associated with a particular decision alternative and the payoff associated with the decision that would yield the most desirable payoff for a given state of nature.

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)= 0.2,P($100,000)= 0.3,P($120,000)= 0.1,and P($140,000)= 0.4. 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(I₁ | 80,000)= 0.1; P(I₁ | 100,000)= 0.2; P(I₁ | 120,000)= 0.6; P(I₁ | 140,000)= 0.3.Should Dollar purchase the forecast? ​

The primary value of decision trees is that they provide a useful way to organize how operations managers think about complex multiphase decisions.

The probability for which a decision maker cannot choose between a certain amount and a lottery based on that probability is the

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

The difference between the expected value of an optimal strategy based on sample information and the "best" expected value without any sample information is called the