MIT15_053S13_rec10sol

Solution the decision tree is so gerber should act

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Unformatted text preview: A Set up the decision tree and find the optimal decision for Gerber. Solution. The decision tree is: So Gerber should act proactively. Part 3.B In the worst case scenario, Gerber would be compensated for some of their losses. How much would Gerber need to be compensated so that Gerber would act passively? Solution. The decision tree is: E [CSF P ] = .5(.25(0) + .75(−2)) + .5(.8(X − 10) + .2(.5)) = −4.7 + .4X, E [CSF P ] = −4.7 + .4X = −0.16875; Therefore, X = $11.329 million. 5 6 MIT OpenCourseWare http://ocw.mit.edu 15.053 Optimization Methods in Management Science Spring 2013 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms....
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