Exam 22: Decision Analysis

Opportunity loss is the difference between the lowest profit for an event and the actual profit obtained for an action taken.

Gross Profits The following payoff table shows gross profits (in $1000)associated with a set of 3 acts under 2 possible states of nature. ​ ​ -{Gross Profits Narrative} If the probability of s₁ is 0.5,then the expected monetary value (EMV)for a₂ is ____________________.

____________________ probabilities are determined before any additional information is acquired.

Incentive programs for sales staff would be considered a state of nature for a business firm.

Which of the following statements is false regarding the expected monetary value (EMV)?

Car Audio Store For a car audio store,a payoff table,the prior probabilities for two states of nature,and the likelihood probabilities are shown below: Payoff Table: ​ ​ -{Car Audio Store Narrative} Use your answers to the previous questions to calculate the expected monetary value with additional information.

We can use the payoff table to calculate the expected monetary value (EMV)and the expected opportunity loss (EOL)of each act (alternative).

Container Company ​ A company must decide whether or not to change its packaging to a more environmentally safe material.The impact of the decision on profits depends on which of the following three possible scenarios develops in the future. ​ Scenario 1: The media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $35 million if they change their packaging now,but will make $75 million if they do not change their packaging now. ​ Scenario 2: The media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $50 million if they change their packaging now,but will make $55 million if they do not change their packaging now. ​ Scenario 3: The media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $60 million if they change their packaging now,but will make only $15 million if they do not change their packaging now. ​ The prior probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively. ​ ​ -{Container Company Narrative} Develop a payoff table for this decision situation.

Which of the following statements is correct?

The preposterior analysis determines whether or not sample information should be purchased to revise the prior probabilities associated with the states of nature.

Maintenance Company For a maintenance company,a payoff table,the prior probabilities for three states of nature,and the likelihood probabilities are shown below: Payoff Table: Prior Probabilities: P(s₁)= 0.4,P(s₂)= 0.5,and P(s₃)= 0.1. Likelihood Probabilities: ​ ​ -{Maintenance Company Narrative} Use the prior and likelihood probabilities to calculate the posterior probabilities for the experimental outcome I₁.

Car Audio Store For a car audio store,a payoff table,the prior probabilities for two states of nature,and the likelihood probabilities are shown below: Payoff Table: ​ ​ -{Car Audio Store Narrative} What is the expected payoff with perfect information?

Demolition Company The payoff table and the prior probabilities for three states of nature for a demolition company are shown below: Prior Probabilities: P(s₁)= 0.4,P(s₂)= 0.5,and P(s₃)= 0.1. ​ ​ -{Demolition Company Narrative} Determine the EOL decision.

Maintenance Company For a maintenance company,a payoff table,the prior probabilities for three states of nature,and the likelihood probabilities are shown below: Payoff Table: Prior Probabilities: P(s₁)= 0.4,P(s₂)= 0.5,and P(s₃)= 0.1. Likelihood Probabilities: ​ ​ -{Maintenance Company Narrative} Use the prior and likelihood probabilities to calculate the posterior probabilities for the experimental outcome I₃.

In general,the expected monetary values (EMV)represent possible payoffs.

Hobby Shop A payoff table and the prior probabilities for two states of nature for a Hobby Shop are shown below: Payoff Table: Prior Probabilities: P(s₁)= 0.4,and P(s₂)= 0.6. ​ ​ -{Hobby Shop Narrative} Determine the EMV decision.

Dishwasher Designs Three different designs are being considered for a new dishwasher,and profits will depend on the combination of the dishwasher design and market condition.The following payoff table summarizes the decision situation,with amounts in millions of dollars. Assume that the following probabilities are assigned to the three market conditions: P(s₁)= 0.1,P(s₂)= 0.6,and P(s₃)= 0.3. ​ ​ -{Dishwasher Designs Narrative} Calculate the expected monetary value for each design with present information.Which design should be selected in order to maximize the firm's expected profit?

Food Market The following table displays the payoffs (in thousands of dollars)for five different decision alternatives under three possible states of nature for a new food market: The prior probabilities of the states of nature are: P(s₁)= 0.2,P(s₂)= 0.3,and P(s₃)= 0.5. ​ ​ -{Food Market Narrative} Calculate the expected monetary value for each alternative with present information.What decision should be made using the EMV criterion?

A company that manufactures baseball gloves is contemplating whether to increase its advertising budget by $3 million for next year.If the expanded advertising campaign is successful,the company expects sales to increase by $4.8 million next year.If the advertising campaign fails,the company expects sales to increase by only $900,000 next year.If the advertising budget is not increased,the company expects sales to increase by $450,000.Identify the possible outcomes in this decision-making problem.

Lingerie Store The following table displays the payoffs (in thousands of dollars)for five different decision alternatives under three possible states of nature for a new Lingerie store: The prior probabilities of the states of nature are: P(s₁)= 0.2,P(s₂)= 0.3,and P(s₃)= 0.5. ​ ​ -{Lingerie Store Narrative} Calculate the expected value of perfect information.