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The basic elements of decision making amid uncertainty, as discussed in SQTs 6 and 7, are: (1) define the set of

decisions or possible outcomes; (2) develop probabilities associated with these outcomes; and (3) analyze monetary values and risk associated with these outcomes. Critique this model for decision making amid uncertainty. How does the model help decision makers and how might the model hinder optimal decision making?

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43 Here's an interesting video with a different take on expected value:
http://www.youtube.com/watch?v=DAjVAEDil_Q
44
45 Here's an example of using a frequency distribution to develop probabilities for outcomes:
46 Let's say you researched the history of car sales for your auto dealership and learned that on 100 different days chosen at random
47 you sold between 0 and 5 cars with the following frequencies
48
49 Use expected value to determine the expected number of cars sold in any given day.
50 Cars Sold in a Day Frequency
51
0
0.6667
52
NP
22
33
53
22
0.6667
1.3333
54
3
12
0.3636
1.0909
55
4
9
0.2727
1.0909
56
5
0.0606
0.303
57
58
100
3.0303
4.8182
59
60 If the average profit on a car sold is $3000, how much revenue would you expect for a 360 day year?
61
62
360
63
3000
64
4.818181818
65
66
67
5,203,636
68
69
70
71
72 Problems
73
74 1. Try the following situation. Would you choose Venture A or Venture B?
75
76
77
Venture A
78
79
Profit scenario A
100
Probability of scenario A
0.4
80
81
Profit scenario B
50
Probability of scenario B
03
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1 Skill Qualification Task 7 - Standard deviation of the probability distribution. Dive in and email if questions:
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4 Let's say you must choose between two manufacturing contracts. Once you choose one, you must tool up the factory for that contract and you cannot take the other contract.
Saudi Arabia will buy between 10 and 18 F/A 18 Fighter Jets depending on their budget and how much pressure the US government can put on them to buy jets they don't need, but will help with US unemployment. You don't know what the final contract will be.
6 Air France will buy between 6 and 9 passenger jets, but they cannot make up their minds. They guarantee the number will be between 6 and 9 and probably one of the extremes.
7 You employ lobbyists and economists who come up with the probabilities displayed in the tables below.
8 The factory has an overhead fixed cost of 28 million dollars (administration, rent, interest, and stuff that must be paid regardless of which contract you choose).
9 The fighter jets yield a profit of 2.25 million dollars each (sell for 12.25 million each and cost 10 million to manufacture)
10 The passenger jets yield a profit of 4.5 million dollars each (sell for 30 million each and cost 25.5 million to manufacture)
11
12 You can employ what you know about Expected Value to come up with the following analysis:
13
14
F/A 18 Jet Fighters for Saudi Arabia
Passenger Jets for Air France
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16
17
No. of jets
Profit per jet Profit
Probability
No. of jets Profit per jet Profit
Probability
18
10
2.25
22.5
0.05
1.125
4.5
27
0.45
12.15
19
2.25
24.75
0.05
1.2375
4.5
31.5
0.05
.575
2.25
27
0.05
1.35
4.5
36
0.05
1.8
14
2.25
29.25
0.1
4 5
18.225
31.5
2.925
10 5
0.45
2.25
0.1
15
2.25
33.75
3.15
13.5
16
2.25
36
0.4
0.1
3.6
17
2.25
38.25
0.1
3.82
18
2.25
40 5
0.05
2.025
32.7375 Expected Value
33.75 Expected Value
28 fixed costs of the factory
28 fixed costs of the factory
4.7375 final bottom line expected net income
5.75 final bottom line expected net income
So! It looks like selling the Passenger Jets to Air France is the better idea, as it has the higher expected value.
5 But let's consider the impact of the standard deviation of the probability distribution:
The standard deviation of the probability distribution is determined by
37
8 1) Subtracting the mean (expected value) from each outcome.
39
2) Then square each deviation.
40
3) Then multiply each squared deviation by the probability of its occurrence
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43 4) Add up the results to get the variance
44
45 5) Lastly, take the square root to get the standard deviation
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