Decision Theory
ECON 332 Managerial Economics and Operations Research
Tutorial Week 5
1. Review of Quiz 1
Decision Analysis:
2.
A manager is deciding whether or not to build a small facility. Demand is uncertain and can be either at a high or low level. If the manager chooses a small facility and demand is low, the payoff is $300. If the manager chooses a small facility and demand is high, the payoff is $100.
On the other hand, if the manager chooses a large facility and demand is low, the payoff is $200, but if demand is high, the payoff is $800.
a.
What would be the best decision based on the maximax criterion?
b.
What would be the best decision based on the maximin criterion?
c.
What would be the best decision based on the minimax regret?
3. The ABC Co. is considering a new consumer product. They believe there is a probability of
0.4 that the XYZ Co. will come out with a competitive product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is
$40,000; if they add an assembly line and XYZ does follow, they still expect a $10,000 profit.
If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of $600,000; if XYZ does compete for this market, ABC expects a loss of
$100,000.
a.
Determine the EMV of each decision.
b.
Determine the EOL of each decision.
c.
Compare the results of (a) and (b).
d.
Calculate the EVPI.
Tutorial Week 5
1. Review of Quiz 1
Decision Analysis:
2.
A manager is deciding whether or not to build a small facility. Demand is uncertain and can be either at a high or low level. If the manager chooses a small facility and demand is low, the payoff is $300. If the manager chooses a small facility and demand is high, the payoff is $100.
On the other hand, if the manager chooses a large facility and demand is low, the payoff is $200, but if demand is high, the payoff is $800.
a.
What would be the best decision based on the maximax criterion?
b.
What would be the best decision based on the maximin criterion?
c.
What would be the best decision based on the minimax regret?
3. The ABC Co. is considering a new consumer product. They believe there is a probability of
0.4 that the XYZ Co. will come out with a competitive product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is
$40,000; if they add an assembly line and XYZ does follow, they still expect a $10,000 profit.
If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of $600,000; if XYZ does compete for this market, ABC expects a loss of
$100,000.
a.
Determine the EMV of each decision.
b.
Determine the EOL of each decision.
c.
Compare the results of (a) and (b).
d.
Calculate the EVPI.