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.
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
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- Spring '07