1.

The following payoff table shows profit for a decision analysis problem with two
decision alternatives and three states of nature:

State of Nature
Alternatives 1 2 3
A 250 100 25
B 100 100 75

a. If the decision maker knows nothing about the probabilities of the three
states of nature, what is the recommneded decision using the optimistic,
conservative, and minimax regret approaches?

2. Southland Corporation's decision to produce a new line of recreational products

resulted in the need to construct either a small plant or a large plant. The best
selection of plant size depends on how the marketplace reacts to the new product
line. To conduct an analysis, marketing management has decided to view the
possible long-run demand as low, medium, or high. The following payoff table shows
the projected profit in millions of dollars:

Long-Run Demand
Plant Size Low Medium High
Small 150 200 200
Large 50 200 500

a. Construct a decision tree

b. Recommned a decision based on the use of the optimistic, conservative,
and minimax regret approaches.

3. Howard Weiss, Inc., is considering building a sensitive new radiation scanning device. His manage
that the ATR Co. will come out with a competitive product. If Weiss adds an ssembly line for the pro
competitive product. Weiss's expected profit is $40,000; if Weiss adds an assembly line and ATR fol
If Weis adds a new plant addition and ATR does not produce a competitive product, Weiss expects
this market, Weiss expects a loss of $100,000
a. Determine the EMV of each decision
b. Commpute the expected value of perfect information
c. Recommned a decision based on the use of the optimistic, conservative,
and minimax regret approaches.
ning device. His managers believe that there is a probability of 0.4
ssembly line for the product and ATR Co. does not follow with a
sembly line and ATR follows suit, Weiss still expects $10,000 profit.
product, Weiss expects a profit of $600,000; if ATR does compete for
ANSWERS

State of Nature
Alternatives 1 2 3
A 250 100 25
B 100 100 75

State of Nature
Alternatives 1 2 3
A 250 100 25
B 100 100 75

State of Nature
Alternatives 1 2 3
A 250 100 25
B 100 100 75

A 250 - 250 = 0 100 - 100 = 0 75 - 25 = 50

B 250 - 100 = 150 100 - 100 = 0 75 - 75 = 0

Regret Table
Alternatives 1 2 3
A 0 0 50
B 150 0 0
HIGH HIGH
"BEST "
Maximax (Optimistic)
250 OPTIMISTC = A
100

LOW HIGH
"BEST OF THE WORST"
Maximin (Conservative)
25
75 CONSERVATIVE = B

AVE HIGH
Minimax
125
91.6666666666667 AVERAGE = HIGHER

REGRET TABLE = LOWER

50 MINIMAX = A
150
 Long-Run Demand
Plant Size Low Medium High Optimistic
Small 150 200 200 200
Large 50 200 500 500

Long-Run Demand
Plant Size Low Medium High Conservative
Small 150 200 200 150
Large 50 200 500 50

Long-Run Demand
Plant Size Low Medium High Minimax
Small 150 200 200 183.33333333
Large 50 200 500 250

Small 150 - 150 = 0 200 -200 = 0 500 - 200 = 300 300

Large 150 - 50 = 100 200 -200 = 0 500-500 = 0 100
Plant Size Large

Plant Size Small

Plant Size Large

a. EMV Expected Monetary Value

States of Nature

Alternatives ATR Co. competes in marke

Assembly Line 10,000
New Plant Addition -100,000
Probabilities 0.4

b. EVPI Expected Value of Perfect Information

States of Nature

Alternatives ATR Co. competes in marke

Assembly Line 10,000
New Plant Addition -100,000
Probabilities 0.4

EVwoPI (EMV) 320,000

( EVPI = EVwPI - EVwoPI )

EVPI 44,000

C. Optimistic = New plant addition

Conservative = Assembly line
Minimax = New plant addition
tates of Nature
ATR Co. doesn't
compete in market EMV
40,000 28,000 A1 0.4 (10,000) + 0.6 (40,000)
600,000 320,000 A2 0.4 (-100,000) + 0.6 (600,000)
0.6

tates of Nature
ATR Co. doesn't
compete in market EVwPI
40,000 0.4 (10,000) + 0.6(600,000)
600,000 364,000
0.6

364,000 - 320,000
.6 (600,000)