Exam 21: Decision-Making Tools

The decision criterion that would be used by an optimistic decision maker solving a problem under conditions of uncertainty would be the

A toy manufacturer has three different mechanisms that can be installed in a doll that it sells.The different mechanisms have three different setup costs (overheads)and variable costs and,therefore,the profit from the dolls is dependent on the volume of sales.The anticipated payoffs are as follows. a.What is the EMV of each decision alternative? b.Which action should be selected? c.What is the expected value with perfect information? d.What is the expected value of perfect information?

The square symbol used in drawing a decision trees represents a ________ node.

In a decision tree,the expected monetary values are computed by working from right to left.

Bratt's Bed and Breakfast,in a small historic Prince Edward Island town,must decide how to subdivide (remodel)the large old home that will become their inn.There are three alternatives: Option A would modernize all baths and combine rooms,leaving the inn with four suites,each suitable for two to four adults.Option B would modernize only the second floor;the results would be six suites,four for two to four adults,and two for two adults only.Option C (the status quo option)leaves all walls intact.In this case,there are eight rooms available,but only two are suitable for four adults,and four rooms will not have private baths.Below are the details of profit and demand patterns that will accompany each option.Which option has the highest expected value?

A do-it-yourself homeowner is installing a new toilet.While installing the toilet he must decide on what kind of connecting pipe he will install to the water supply.There are two available options,one that has a shut-off valve in case of a leak and a cheaper one without the shut-off valve.Suppose that the shut-off valve pipe costs an extra ten dollars and that the homeowner must buy one of the two. a.Draw a decision tree for this scenario,labeling the cost of a leak as X and the chance of a leak as P. b.If the chance of a leak causing household damage is 1%,at what $ amount of household damage is the owner neutral on which pipe to buy? c.If the cost of a leak would be $10,000 what is the maximum % chance to leak at which the homeowner would prefer to buy the cheaper pipe? d.If the cost of a leak is $1,000 and the chance to flood .1% which pipe should the homeowner buy?

A toy manufacturer makes stuffed kittens and puppies which have relatively lifelike motions.There are three different mechanisms which can be installed in these "pets." These toys will sell for the same price regardless of the mechanism installed,but each mechanism has its own variable cost and setup cost.Profit,therefore,is dependent upon the choice of mechanism and upon the level of demand.The manufacturer has in hand a forecast of demand that suggests a 0.2 probability of light demand,a 0.45 probability of moderate demand,and a probability of 0.35 of heavy demand.Payoffs for each mechanism-demand combination appear in the table below. Construct the appropriate decision tree to analyse this problem.Use standard symbols for the tree.Analyse the tree to select the optimal decision for the manufacturer.

When solving decision trees,what phrase represents the act of dropping an alternative from consideration because it is less favorable than another available option?

A problem that involves a sequence of decisions

The construction manager for Acme Construction,Inc.must decide whether to build single family homes,apartments,or condominiums.This is not a product-mix problem,but an all-or nothing decision.He will hire workers and rent equipment appropriate for one action only.He estimates annual profits (in thousands of dollars)will vary with population trends as follows: a.If he uses the maximin criterion,which type of dwellings will he choose to build? Show your supporting calculations. b.If he uses the equally likely criterion,which kind of dwellings will he choose to build? Show your supporting calculations. c.If the construction manager were an optimist,what criterion would he choose? What would be the choice of dwelling for that criterion? Show your supporting calculations.

The difference between the expected payoff under perfect information and the maximum expected payoff under risk is

What is the EMV for Option 2 in the following decision table?

________ is the criterion for decision making under certainty that assigns equal probability to each state of nature.

Steve Gentry,the operations manager of Baja Fabricators,wants to purchase a new profiling machine (it cuts compound angles on the ends of large structural pipes used in the fabrication yard).However,because the price of crude oil is depressed,the market for such equipment is down.Steve believes that the market will improve in the near future and that the company should expand its capacity.The table below displays the three equipment options he is currently considering,and the profit he expects each one to yield over a two-year period.The consensus forecast at Baja is that there is about a 30% probability that the market will pick up "soon" (within 3 to 6 months)and a 70% probability that the improvement will come "later" (in 9 to 12 months,perhaps longer). a.Calculate the expected monetary value of each decision alternative. b.Which equipment option should Steve take?

A plant manager wants to know how much he should be willing to pay for perfect market research.Currently there are two states of nature facing his decision to expand or do nothing.Under favorable market conditions the manager would make $100,000 for the large plant and $5,000 for the small plant.Under unfavorable market conditions the large plant would lose $50,000 and the small plant would make $0.If the two states of nature are equally likely,how much should he pay for perfect information?

The expected value with perfect information assumes that all states of nature are equally likely.

The campus bookstore sells highlighters that it purchases by the case.Cost per case,including shipping and handling,is $200.Revenue per case is $350.Any cases unsold will be discounted and sold at $175.The bookstore has estimated that demand will follow the pattern below a.Construct the bookstore's payoff table. b.How many cases should the bookstore stock in order to maximize profit? c.How would your answer differ if the clearance price were not $175 per case but $225 per case? (It is not necessary to re-solve the problem to answer this. )