Exam 22: Decision-Making Tools

Bratt's Bed and Breakfast,in a small historic New England town,must decide how to subdivide (remodel)the large old home that will become an 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?

In a decision tree,a square symbol represents a state of nature node.

The expected value with perfect information is:

An example of a conditional value would be the payoff from selecting a particular alternative when a particular state of nature occurs.

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?

In terms of decision theory,an occurrence or situation over which the decision maker has no control is called a(n):

A decision maker using the maximax criterion on the problem below would choose Alternative ________ because the maximum of the row maximums is ________.

For the following decision table,the highest value for the equally likely criterion is ________;this occurs with alternative ________.

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

In the context of decision making,define an alternative.

Decision trees and decision tables can both solve problems requiring a single decision,but decision tables are the preferred method when a sequence of decisions is involved.

The last step in the analytic decision process is to clearly define the problem and the factors that influence it.

Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort.The sale of Sno-Cones is highly dependent upon his location and upon the weather.At the resort,he will profit $110 per day in fair weather,$20 per day in foul weather.At home,he will profit $70 in fair weather,$50 in foul weather.Assume that on any particular day,the weather service suggests a 60% chance of fair weather. a.Construct Earl's payoff table. b.What decision is recommended by the expected monetary value criterion? c.What is the EVPI?

Identify,in order,the six steps of analytical decision making.

A state of nature is an occurrence or a situation over which the decision maker has little or no control.

The EMV of a decision with three states of nature is $33,000.If the profit/value under the states of nature A,B,and C is $10,000,$20,000,and $50,000,respectively,and states B and C have equal probabilities,determine the likelihood of state of nature A.

A primary advantage of decision trees compared to decision tables is that decision trees:

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?

A(n)________ is a graphical means of analyzing decision alternatives and states of nature.

Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort.The sale of Sno-Cones is highly dependent upon his location and upon the weather.At the resort,he will profit $120 per day in fair weather,$10 per day in bad weather.At home,he will profit $70 in fair weather,$55 in bad weather.Assume that on any particular day,the weather service suggests a 40% chance of foul weather. a.Construct Earl's decision tree. b.What decision is recommended by the expected value criterion?