Exam 21: Decision-Making Tools

Suppose a manufacturing plant is considering three options for expansion.The first one is to expand into a new plant (large),the second to add on third-shift to the daily schedule (medium),and the third to do nothing (small).There are three possibilities for demand.These are high,medium,and low with each having an equal likelihood of occurring.Suppose that the profits for the expansion plans are as follows (respective to high,medium,low demand).The large expansion profits are $100000,$10000,-$10000,the medium expansion choice $40000,$40000,$5000 and the small expansion choice $15000,$15000,$15000.Calculate the EMV of each choice.Which of the expansion plans should the manager choose?

Describe the meaning of EVPI.Provide an example in which EVPI can help a manager.

What is the expected value with perfect information of the following decision table?

The highest value for the equally likely criterion is ________;this occurs with alternative ________.

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 and states B and C have equal probabilities,determine the likelihood of state of nature A.

If a decision maker has to make a certain decision only once,expected monetary value is a good indication of the payoff associated with the decision.

Which technique results in an optimistic decision? Why?

The EMV of a decision with three states of nature is $50.If the profit/value of A is 1/3 of B and B is 1/3 of C,determine the profit from A if B and C have an equal chance of occurring that combined is twice the chance of A occurring.

A tabular presentation that shows the outcome for each decision alternative under the various possible states of nature is called a(n)

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.

The expected value of perfect information (EVPI)is the

If a decision maker is a pessimist,what decision-making criterion is appropriate? Why?

What is the expected value of perfect information of the following decision table?

The maximin criterion is pessimistic,while the maximax criterion is optimistic.

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

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

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

A local business owner is a bit uncertain of the demand forecast,and is timidly approaching the capacity decision for a business he is about to open.Here's how he describes the decisions that confront him over the next two years."First,I have to choose between building a large plant initially and building a small one that has room to expand.Or I could rent now,and decide whether to build next year.That one,too,could be the large version or the small.If I build small,then after one year,I can review how good business was,and decide whether to expand.If I build large,there is no further option to enlarge."Do not concern yourself with probabilities or payoff values .Simply draw the tree that illustrates the manager's decision alternatives and the chance events that go along with them.Use standard symbols for decision tree construction,and label all parts of your diagram carefully.To simplify,assume that business in the first year,and in the second,can be only "good" or "bad."

What is a conditional value?

The expected value of perfect information is the same as the expected value with perfect information.