ITOM Test 1 Sheet

# ITOM Test 1 Sheet - ITOM Test#1(Chapters 1,4,6 Chapter 1...

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ITOM Test #1 (Chapters 1,4,6) Chapter 1: Potential reasons for a quantitative analysis approach: If the problem is: 1. complex 2. very important 3. new 4. repetitive Cost/Benefit considerations must be made in selecting an appropriate mathematical model Cost Function: TC=FC+VC Revenue Function: TR=MR(Q) Profit Function: TP=TR – TC Breakeven Analysis: set profit function equal to zero and solve for Q Excel: Use “Goal Seek” tool to determine breakeven “Goal Seek” Box: Set Cell: Total Profit; To Value: 0; By Changing Cell: Variable(Q,Sales) Chapter 4: A decision problem is characterized by decision alternatives, states of nature, and resulting payoffs. Decision alternatives are the different possible strategies the decision maker can employ. (denoted d i ) States of nature refer to future events, not under the control of the decision maker. Defined so that they are mutually exclusive and collectively exhaustive. (denoted s j ) Decision making without probabilities: Optimistic approach: decision with the largest possible payoff is chosen. Conservative Approach: For each decision the minimum payoff listed, then the decision corresponding to the maximum of these minimum payoffs is selected Minimax Regret Approach: construction of a regret table; maximum regret for each possible decision is listed; decision chosen is the one corresponding to the minimum of the maximum regrets Decision making with probabilities: Expected Value Approach: expected return for each decision is calculated by computing a weighted average of the possible payoffs under each state of nature; Decision tree is a chronological representation of the decision problem; Use squares to represent decision nodes; Use circles to represent state-of- nature nodes Excel: Decision trees are made in “TreePlan” Expected Value of Perfect Information (EVPI): the increase in the expected profit that would result if one knew with certainty which state of nature would occur EVPI Steps: Step 1: Determine the optimal decision for each state of nature Step 2: Compute the expected value of this decision strategy which uses perfect information. Step 3: Subtract the EV of the optimal decision

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## This note was uploaded on 02/20/2011 for the course ITOM 2301 taught by Professor Rasperry during the Spring '11 term at SMU.

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ITOM Test 1 Sheet - ITOM Test#1(Chapters 1,4,6 Chapter 1...

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