Tutorial 2 S11. SOLUTIONS

# Tutorial 2 S11. SOLUTIONS - TUTORIAL 2 WITH SOLUTIONS 1...

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TUTORIAL 2 WITH SOLUTIONS 1. Aigerim K. is considering the possibility of opening a dress shop. Her options are to open a small shop, a medium-sized shop, or no shop at all. The market for a dress shop can be good, average, or bad. The net profit or loss for the medium-sized or small shops for the various market conditions are given below (prior probabilities are in parentheses). Building no shop at all yields no loss and no gain. What do you recommend? Solution. a) Optimistic approach Because \$100,000 , corresponding to d 2 , is the largest payoff, d 2 (to open a medium-sized shop) is the recommended decision alternative using the optimistic approach. b) Conservative approach Because 0 , corresponding to d 3 , yields the maximum of the minimum payoffs, the decision alternative of to build no shop at all is recommended. In the conservative approach, Aigerim is guaranteed no loss and no gain. Although Aigerim may make more, it cannot make less than nothing. c) Minimax regret approach Opportunity loss table For this problem, the alternative d 1 (to open a small shop), with a corresponding maximum regret of \$40 million, is the recommended minimax regret decision. 2. Suppose the firm is attempting to determine the size of the computer system that would be the most economical to lease. The goal of the decision analysis is to help the firm make its computer leasing decision. For the firm the final decision will be to lease one of three computer systems, which differ in size and capacity. The three alternatives are: Alternatives Good market, 1 s (0.2) Average market, 2 s (0.5) Bad market, 3 s (0.3) Max payoff 1 d \$75,000 \$25,000 -\$40,000 \$75,000 d 2 \$100,000 \$35,000 -\$60,000 \$100,000 3 d 0 0 0 0 Alternatives Good market, 1 s (0.2) Average market, 2 s (0.5) Bad market, 3 s (0.3) Min payoff 1 d \$75,000 \$25,000 -\$40,000 -\$40,000 d 2 \$100,000 \$35,000 -\$60,000 -\$60,000 d 3 0 0 0 0 Alternatives Good market, 1 s (0.2) Average market, 2 s (0.5) Bad market, 3 s (0.3) Max regret d 1 \$25,000 \$10,000 \$40,000 \$40,000 d 2 0 0 \$60,000 \$60,000 d 3 \$100,000 \$35,000 0 \$100,000

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d 1 = lease the large computer system d 2 = lease the medium-sized computer system d 3 = lease the small computer system. Management believed that the firm’s overall level of acceptance in the market place would be one of two possibilities: high acceptance or low acceptance. Thus the states of nature are as follows: s 1 = high customer acceptance s 2 = low customer acceptance.
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Tutorial 2 S11. SOLUTIONS - TUTORIAL 2 WITH SOLUTIONS 1...

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