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# moduleAsolutions - MODULE A DISCUSSION QUESTIONS 4 EMV is...

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MODULE A DISCUSSION QUESTIONS 4. EMV is defined as the expected monetary value . The EMV is the expected or average return that we would realize if we were to repeat the decision an infinite number of times. “Expected value under certainty” is the expected or average return that we would realize if we were to repeat the decision an infinite number of times, each time having “perfect” or complete information and making the “best” possible decision based on that information. EVPI is defined as the expected value of perfect information . EVPI is equal to the difference between EMV (the expected or average return given that we were to make the decision based on current or available information) and “expected value under certainty” and is the maximum amount we would be willing to pay for additional (perhaps, perfect) information. Determination of EVPI is useful any time the manager has the option of expending additional resources to acquire additional information and making the decision using currently available information. 9. Maximax is the optimistic criterion. It maximizes the maximum outcome. 10. Maximin is the pessimistic criterion. It maximizes the minimum outcome. END-OF-MODULE PROBLEMS A.1 States of Nature Alternatives Very Favorable Market Average Market Unfavorable Market Row Minimum Row Maximum Row Average Large plant \$275,000 \$100,000 –\$150,000 –150,000 275,000 75,000 Small plant \$200,000 \$60,000 –\$10,000 –10,000 200,000 83,333 Overtime \$100,000 \$40,000 –\$1,000 –1,000 100,000 46,333 Do nothing \$0 \$0 \$0 0 0 0 maximin maximax equally likely (a) Large plant (b) Do nothing (c) Small plant A.2 (a) Market Size of First Station Good Market Fair Market Poor Market Row Minimum Row Maximum Row Average Small 50,000 20,000 –10,000 –10,000 50,000 20,000 Medium 80,000 30,000 –20,000 –20,000 80,000 30,000 Large 100,000 30,000 –40,000 –40,000 100,000 30,000 Very large 300,000 25,000 –160,000 –160,000 300,000 55,000 maximin maximax equally likely (b) Maximax decision: very large station (c) Maximin decision: small station Quantitative Module A: Decision-Making Tools 1

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(d) Equally likely decision: very large station A.3 EMV (large stock) = - = ( 29 ( 29 ( 29 0 3 22 0 5 12 0 2 2 12 2 . + . + . . EMV (average stock)
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moduleAsolutions - MODULE A DISCUSSION QUESTIONS 4 EMV is...

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