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STATES OF fNATURE
STATES OF fNATURE
STATES OF fNATURE
STATES OF fNATURE
f STATES OF
NATURE
REGRET TABLE:
f STATES OF
NATURE
Ultra-Smart Research must be willing to pay $ 404,250 for the perfect information
service offered by the marketing firm.
(A) MAXIMIN CRITERION
f STATES OF
NATURE
FORMULA::
EQUALLY LIKELY VALUE FOR AN ALTERNATIVE = AVERAGE OF ALL ITS PAYOFFS
UNDER DIFFERENT STATES OF NATURE
f STATES OF
NATURE
VARIANCE = [(6,000 - 2,000)^2 * 0.2] + [(6,000 - 8,000)^2 *0.4] + [(6,000 - 6,000)^2 *0.4)]
VARIANCE = 4,800,000
STANDARD DEVIATION = 2190.89
VARIANCE = [(6,000 - 5,600 )^2 *0.2] + [(6,000 - 5,600)^2 *0.4] + [(5,000 - 5,600)^2 *0.4)]
VARIANCE = 240,000
STANDARD DEVIATION = 489.898
ALTERNATIVE S1 S2 S3 MINIMUM
(0.4) (0.35) (0.25)
A1 50 80 30 30
A2 35 50 40 35
A3 60 30 50 30
MAXIMIN VALUE = 35
MAXIMIN DECISION = ALTERNATIVE A2
STATES OFfNATURE
ALTERNATIVE S1 S2 S3 EMV
(0.4) (0.35) (0.25)
A1 50 80 30 $ 55.50
A2 35 50 40 $ 41.50
A3 60 30 50 $ 47
REGRET TABLE:
STATES OFfNATURE
SMALL COMPLEX, d1 12 0 12
MEDIUM COMPLEX, d2 6 2 6
LARGE COMPLEX, d3 0 16 16
MINIMAX VALUE = 6
MINIMAX REGRET APPROACH DECISION = CHOOSE MEDIUM COMPLEX
(D) EMV DECISION
STATES OFfNATURE
SINCE LARGE COMPLEX HAS THE MAXIMUM EMV, THEREFORE CHOOSE LARGE
COMPLEX.
CASELOAD
FOR REDESIGN
EVPI is the maximum amount the investor will be willing to pay for additional
information about a decision problem, i.e., if we have perfect information about the
state of nature before the decision is made, how much is this information worth. In
this case, it is $ 800.
AT POINT OF INDIFFERENCE