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# TOM ch5s - c Demand Low Demand High Slope Equation Build...

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Name: VINCENT LUU TOM 301-02 (9:15 AM- 10:20 AM) Make up Homework CHAPTER 5S- SUPPLEMENT: DECISION THEORY Problem #4 a) b) Compute the EVPI EVPI= Expected payoff under certainty - Expected payoff under risk Compute the expected payoff under certainty The best payoff under low demand: Build Small: .4(400,000) = 160,000 Build Large: .4(-10,000) = -4,000 Choose build small which is the best payoff under low demand. The best payoff under high demand: Build Small: Maintain= .6(50,000) = 30,000

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Expand = .6(450,000) = 270,000 Choose Expand which is 270,000 Build Large: .6(800,000) = 480,000 Choose build large which has the best payoff under high demand. Thus, expected payoff under certainty: .4(400,000) + .6(800,000) = 640,000 Compute the expected payoff under risk: Build small: .4(400,000) + .6(450,000) = 430,000 Build large: .4(-10,000) + .6(800,000) = 476,000 Choose build large which is 476,000. Hence, the EVPI will be: EVPI= 640,000 – 476,000 = 164,000 units

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Unformatted text preview: c) Demand Low Demand High Slope Equation Build Small 400K 450K 450 – 400 = 50K 400 + 50P(2) Build Large -10K 800K 800 – (-10) = 810K -10 + 810P(2) *400 + 50P(2) = -10 + 810P(2) P(2) = 760/410 = .54 P(1) = 1.00 - .54 = .46 Thus, build large is best from P(1) = 0 up to P(1) = .46 Build small will be best from P(1) = .46 up to P(1) = 1.00 Problem #11 Alternative A: • .3 x (1/3.(0) + 1/3.(60) + 1/3.(90)) = 15 .3.(40) = 12 Choose 15 which is the best payoff • .5.(44) = 22 • .2.(60) =12 EMV = 15 + 22 + 12 = 49 Alternative B: • .3 x (1/3.(-45) + 1/3.(45) + 1/3.(99)) = 9.9 .3.(40) = 12 Choose 12 which is the best payoff • .5.(50) = 25 • .2.(30) = 6 .2.(1/2.(40) + ½.(50)) = 9 Choose 9 which is the best payoff Hence, the EMV = 12 + 25 + 9 = 46 Compare both EVM of 2 Alternative, we choose the Alternative A which has the highest EMV = 49....
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TOM ch5s - c Demand Low Demand High Slope Equation Build...

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