QUANTITATIVE METHODS FOR DECISION MAKING

ASSIGNMENT No. 1

SUBMITTED TO

DR. RAZIUDDIN SIDDIQUI

BY MIRZA ARSHAD BAIG EMBA PS-IX 13-05-2012

Assignment:
For the decision situation represented by the following pay off table, find the best decision, E(Cost) and EVPI. Decision Alternatives S1 d1 d2 d3 d4 Probability
10 3 -4 -7 0.1 7 10 8 12 0.4

Events S2 S3
9 12 14 10 0.3

E(decision) S4
5 8 9 14 0.2

Solution:Calculation of E(Cost) E(d1) = 0.1 x 10 + 0.4 x 7 + 0.3 x 9 + 0.2 x 5 = 1.0 + 2.8 + 2.7 + 1.0 = 7.5 E(d2) = 0.1 x 3 + 0.4 x 10 + 0.3 x 12 + 0.2 x 8 = 3.0 + 4.0 + 3.6 + 1.6 = 9.5 E(d3) = (0.1 x -4) + 0.4 x 8 + 0.3 x 14 + 0.2 x 9 = -0.4 + 3.2 + 4.2 + 1.8 = 8.8 E(d4) = (0.1 x -7) + 0.4 x 12 + 0.3 x 10 + 0.2 x 14 = -0.7 + 4.8 + 3.0 + 2.8 = 9.9 E(Cost) = d1 = 7.5 Interpretation:- Under the Criterion of lowest cost, the decision 1 (d1) will be the best choice with lowest cost of 7.5.

Calculation of ECPI (Expected Cost Perfect Information) ECPI = -7 x 0.1 + 7 x 0.4 + 9 x 0.3 + 5 x 0.2 = -0.7 + 2.8 + 2.7 + 1.0 = 5.8 Calculation of EVPI (Expected Valuefor Perfect Information) EVPI = ECPI E(cost) or EVPI = E(cost) - ECPI = 5.8 7.5 or = 7.5 5.8 = -1.7 or = 1.7 EVPI = -1.7 or EVPI = 1.7

Interpretation:- Under the Criterion of switching from situation to situation , we can save 1.7 more by making decision on ECPI (Expected Cost Perfect Information).