Exam 8: Decision Analysis

What is the correct equation for computing the expected value of perfect information (EVPI)?

Use this information to answer the following questions. ABC Inc.must make a decision on its current capacity for next year.Estimated profits (in $000s)based on next year's demand are shown in the table below. Next Year's Demand Alternative Low High Expand \ 100 \ 200 Subcontract \ 50 \ 120 Do Nothing \ 40 \ 50 -Refer to the information above.Assume that ABC Inc.has hired a marketing research firm that provided additional information regarding next year's demand.Suppose that the probabilities of low and high demand are assessed as follows: P(Low)= 0.4 and P(High)= 0.6. a.Which alternative should be chosen using the expected monetary value (EMV)criterion? b.What is the expected value under certainty? c.What is the expected value under perfect information (EVPI)?

Determining the best payoff for each alternative and choosing the alternative with the "best of the best" is the approach called:

The expected monetary value (EMV)approach allows you to incorporate your own attitude toward risk.

The approach that is used for analyzing decision trees is called:

The maximin criterion approach selects the "best of the worst."

Use this information to answer the following questions. ABC Inc.must make a decision on its current capacity for next year.Estimated profits (in $000s)based on next year's demand are shown in the table below. Next Year's Demand Alternative Low High Expand \ 100 \ 200 Subcontract \ 50 \ 120 Do Nothing \ 40 \ 50 -Refer to the information above. a.Which alternative should be chosen based on the maximax criterion? b.Which alternative should be chosen based on the maximin criterion? c.Which alternative should be chosen based on the Lapalce criterion? d.Which alternative should be chosen based on criterion of realism with alpha = 0.7? e.Which alternative should be chosen based on the minimax regret criterion?

The minimum guaranteed amount you are willing to accept to avoid the risk associated with a gamble is referred to as the ________.

Determining the average payoff for each alternative and choosing the one with the best payoff is the approach called:

Suppose that the utility function for a decision maker is represented as follows: U(x)= x².The potential payoffs that are possible are illustrated below. Payoff (x) $100 $200 $300 $400 $500 $600 $700 $800 $900 $1000 Convert these payoffs into utility values using the above function.Plot the utility curve and determine whether the decision maker is a risk avoider,risk indifferent,or a risk seeker.

Use this information to answer the following questions. A bakery must decide how many pies to prepare for the upcoming weekend.The bakery has the option to make 50,100,or 150 pies.Assume that demand for the pies can be 50,100,or 150.Each pie costs $5 to make and sells for $7.Unsold pies are donated to a nearby charity center.Assume that there is no opportunity cost for lost sales. -Refer to the information above. a.Which alternative should be chosen based on the maximax criterion? b.Which alternative should be chosen based on the maximin criterion? c.Which alternative should be chosen based on the Lapalce criterion? d.Which alternative should be chosen based on criterion of realism with alpha = 0.8? e.Which alternative should be chosen based on the minimax regret criterion?

Use this information to answer the following questions. A plant manager is considering buying additional stamping machines to accommodate increasing demand.The alternatives are to buy 1 machine,2 machines,or 3 machines.The profits realized under each alternative are a function of whether their bid for a recent defense contract is accepted or not.The payoff table below illustrates the profits realized (in $000's)based on the different scenarios faced by the manager. Alternative Bid Accepted Bid Rejected Buy 1 machine \ 10 \ 5 Buy 2 machines \ 30 \ 4 Buy 3 machines \ 40 \ 2 -Refer to the information above. a.Which alternative should be chosen based on the maximax criterion? b.Which alternative should be chosen based on the maximin criterion? c.Which alternative should be chosen based on the Lapalce criterion? d.Which alternative should be chosen based on criterion of realism with alpha = 0.8? e.Which alternative should be chosen based on the minimax regret criterion?

A defense contractor has submitted a bid to make new helmets for the army.The defense contractor believes that the odds of winning the bid stand at 50-50 chance.Past history indicates that if the bid is successful,there is a 0.75 probability that the contractor will hear about the status of the bid within one week.There is also a 0.40 probability that the contractor will hear from the army within one week if the bid is unsuccessful.What is the probability that the bid is successful if the contractor hears about the status of the bid within one week? Use Bayes' theorem to compute this posterior probability.