Exam 22: Decision-Making Tools

Steve Gentry,the operations manager of Baja Fabricators,wants to purchase a new profiling machine (it cuts compound angles on the ends of large structural pipes used in the fabrication yard).However,because the price of crude oil is depressed,the market for such equipment is down.Steve believes that the market will improve in the near future and that the company should expand its capacity.The table below displays the three equipment options he is currently considering,and the profit he expects each one to yield over a two-year period.The consensus forecast at Baja is that there is about a 30% probability that the market will pick up "soon" (within 3 to 6 months)and a 70% probability that the improvement will come "later" (in 9 to 12 months,perhaps longer). a.Calculate the expected monetary value of each decision alternative. b.Which equipment option should Steve take?

What is the EMV for Option 2 in the following decision table?

The expected value with perfect information:

Suppose a manufacturing plant is considering three options for expansion.The first one is to expand into a new plant (large),the second to add on third-shift to the daily schedule (medium),and the third to do nothing (small).There are three possibilities for demand.These are high,medium,and low with each having an equal likelihood of occurring.Suppose that the profits for the expansion plans are as follows (respective to high,medium,low demand).The large expansion profits are $100000,$10000,-$10000,the medium expansion choice $40000,$40000,$5000 and the small expansion choice $15000,$15000,$15000.Calculate the EMV of each choice.Which of the expansion plans should the manager choose?

What is the EMV for Option 1 in the following decision table?

The construction manager for Acme Construction,Inc.must decide whether to build single family homes,apartments,or condominiums.This is not a product-mix problem,but an all-or-nothing decision.He will hire workers and rent equipment appropriate for one action only.He estimates annual profits (in thousands of dollars)will vary with population trends as follows: a.If he uses the maximin criterion,which type of dwellings will he choose to build? Show your supporting calculations. b.If he uses the equally likely criterion,which kind of dwellings will he choose to build? Show your supporting calculations. c.If the construction manager were an optimist,what criterion would he choose? What would be the choice of dwelling for that criterion? Show your supporting calculations.

Which of the following is NOT considered a step in the decision-making process?

Analytic decision making is based on logic and considers all available data and possible alternatives.

Define expected monetary value (EMV).

A branch of a decision tree that is less favorable than other available options may be ________.

If a decision maker is a pessimist,what decision-making criterion is appropriate? Why?

A square node on a decision tree infers that:

A(n)________ is a tabular means of analyzing decision alternatives and states of nature.

Miles is considering buying a new pickup truck for his lawn service firm.The economy in town seems to be growing,and he is wondering whether he should opt for a subcompact,compact,or full-size pickup truck.The smaller truck would have better fuel economy,but would sacrifice capacity and some durability.A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year,a 20% chance of higher gas prices,and a 50% chance that gas prices will stay roughly unchanged.Based on this information,Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.Develop a decision tree for this situation and indicate which type of truck he should select.

Which decision rule under uncertainty results in an optimistic decision? Why?

A decision tree is a(n):

There are three equally likely states of nature (High,Medium,and Low demand).If the large factory will post profits of $50,000,$25,000,and - $10,000 under these states of nature,respectively,what is the EMV of the factory?

What is the EMV for Option 2 in the following decision table?

________ is the criterion for decision making under uncertainty that finds an alternative that maximizes the minimum outcome.

For the following decision table,the highest value for the equally likely criterion is ________; this occurs with alternative ________.