Chapt 14

# Chapt 14 - 1 a s1 d1 s2 s3 s1 d2 s2 s3 b Decision d1 d2...

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1. a. s 1 s 3 s 2 s 1 s 3 s 2 d 1 d 2 250 100 25 100 100 75 b. Decision Maximum Profit Minimum Profit d 1 250 25 d 2 100 75 Optimistic approach: select d 1 Conservative approach: select d 2 Regret or opportunity loss table: s 1 s 2 s 3 d 1 0 0 50 d 2 150 0 0 Maximum Regret: 50 for d 1 and 150 for d 2 ; select d 1 3. a. The decision to be made is to choose the best plant size. There are 2 alternatives to choose from: a small plant or a large plant. The chance event is the market demand for the new product line. It is viewed as having 3 possible outcomes (states of nature): low, medium and high. b. Influence Diagram: c. 14 - 1 Plant Size Market Demand Profit

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Chapter 14 d. Decision Maximum Profit Minimum Profit Maximum Regret Small 200 150 300 Large 500 50 100 Optimistic approach: select Large plant Conservative approach: select Small plant Minimax regret approach: select Large plant 7. a. EV(own staff) = 0.2(650) + 0.5(650) + 0.3(600) = 635 EV(outside vendor) = 0.2(900) + 0.5(600) + 0.3(300) = 570 EV(combination) = 0.2(800) + 0.5(650) + 0.3(500) = 635 The optimal decision is to hire an outside vendor with an expected annual cost of \$570,000. b. The risk profile in tabular form is shown. Cost Probability 300 0.3 600 0.5 900 0.2 1.0 A graphical representation of the risk profile is also shown: 14 - 2 Small Large Low Medium High Low Medium High 150 200 200 50 200 500 0.1 0.2 0.3 0.4 0.5 300 600 900 Cost Pr o ba b il i t y
Decision Analysis 10. a. b. EV(node 2) = 0.2(1000) + 0.5(700) + 0.3(300) = 640 EV(node 4) = 0.3(800) + 0.4(400) + 0.3(200) = 460 EV(node 5) = 0.5(1600) + 0.3(800) + 0.2(400) = 1120 EV(node 3) = 0.6EV(node 4) + 0.4EV(node 5) = 0.6(460) + 0.4(1120) = 724 Space Pirates is recommended. Expected value of \$724,000 is \$84,000 better than Battle Pacific. c.

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Chapt 14 - 1 a s1 d1 s2 s3 s1 d2 s2 s3 b Decision d1 d2...

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