Exam 21: Decision-Making Tools

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

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

A retailer is deciding how many of a certain product to stock.The historical probability distribution of sales for this product is 0 units,0.2;1 unit,0.3;2 units,0.4,and 3 units,0.1.The product costs $8 per unit and sells for $25 per unit.The conditional value for the decision alternative "Stock 3" and state of nature "Sell 1" is

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?

Explain the graphical shapes used in decision tree analysis.

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

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?

The expected value with perfect information is

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

An operations manager's staff has compiled the information below for four manufacturing alternatives (E,F,G,and H)that vary by production technology and the capacity of the machinery.All choices enable the same level of total production and have the same lifetime.The four states of nature represent four levels of consumer acceptance of the firm's products.Values in the table are net present value of future profits in millions of dollars.Forecasts indicate that there is a 0.1 probability of acceptance level 1,0.2 chance of acceptance level 2,0.4 chance of acceptance level 3,and 0.3 change of acceptance level 4. Using the criterion of expected monetary value,which production alternative should be chosen?

What is the EMV for Option 1 in the following decision table?

What is the EMV for Option 1 in the following decision table?

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

________ is the expected payout or value of a variable that has different possible states of nature,each with an associated probability.

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

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?

A problem that involves a sequence of decisions

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

The campus bookstore sells stadium blankets embroidered with the university crest.The blankets must be purchased in bundles of one dozen each.Each blanket in the bundle costs $65,and will sell for $90.Blankets unsold by graduation will be clearance priced at $20.The bookstore estimates that demand patterns will follow the table below. a.Build the decision table. b.What is the maximum expected value? c.How many bundles should be purchased?

Miles is considering buying a new pickup truck for his lawn service firm.The economy in town seems to be growing,and he is wondering whether he should opt for a subcompact,compact,or full-size pickup truck.The smaller truck would have better fuel economy,but would sacrifice capacity and some durability.A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year,a 20% chance of higher gas prices,and a 50% chance that gas prices will stay roughly unchanged.Based on this information,Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.Develop a decision tree for this situation and indicate which type of truck he should select.