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D0010

Exercise 3
Decision Theory Models

I. Compute for the following

1. A concessionaire for the local ballpark has developed a table of conditional values for
the various alternatives (stocking decision) and states of nature (size of crowd).

STATES OF NATURE
(size of crowd)
Alternatives Large Averag Small
e
Large Inventory $22,00 $12,00 $2,0
0 0 00
Average $15,00 $12,00 $6,000
Inventory 0 0
Small Inventory $ $ $5,000
9,000 6,000

If the probabilities associated with the states of nature are 0.30 for a large crowd,
0.50 for an average crowd, and 0.20 for a small crowd, determine:

(a) The alternative that provides the greatest expected monetary value (EMV)
(b) The expected value of perfect information (EVPI)

2. Identify which alternative Goleb Transport must take.

George Goleb is considering the purchase of two types of industrial robots. The
Rob1 (alternative 1) is a large robot capable of performing a variety of tasks, including
welding, painting, etc. The Rob2 (alternative 2) is a smaller and slower robot, but it has
all the capabilities of Rob1. The robots will be used to perform a variety of operations on
large industrial equipment. Of course, George can always do nothing and not buy any
robots (alternative 3). The market for the repair could be either favorable (event 1) ore
unfavorable (event 2). George has constructed a payoff matrix showing the expected
returns of each alternative and the probability of a favorable or unfavorable market. The
data are presented below.

Event 1 Event 2
Probability
0B 0.6 0.4
Alternative 1 50,000 - 40,000
Alternative 2 30,000 - 20,000
Alternative 3 0 0

Exercise 3 *Property of STI
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is considering a new consumer product. The ABC Co. If ABC adds a new plant addition and XYZ does not produce a competitive product.4 that the XYZ Co. Each case of green sells for P15. fresh greens are his primary produce.1 4. Joe’s Fresh Fruit Joe Castillo owns and operates a large fresh fruit stand in Knoxville. ABC expects a loss of $100. The probabilities of sales for cases of greens are as follows: Daily Sales (Cases) 1B Probability at this level 5 0.000 profit.000.1 7 0.Joe’s cost is P5 for each case. if XYZ does compete for this market.000. Cases that are not sold for P1 a case at the end of the day to a small grocery store.000. Compute for the marginal profit /loss and the probability. They believe that there is a probability of 0. will come out with a competitive product. they still expect $10.2 8 0.1 6 0. their expected profit is $40. Tennessee. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product. if they add an assembly line and XYZ does follow. they expect a profit of $600.2 10 0. D0010 3.3 9 0. (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 Exercise 3 *Property of STI Page 2 of 2 .