(a) Decision making under risk: In this case, we consider different states of nature for which

probabilities are available based on the past data. We make a payoff matrix by taking strategies
along the columns and states of nature along the rows. Then, we find the expected payoffs
corresponding to each strategy by multiplying the values in each column by the corresponding
probabilities and adding them up. Select that strategy where the expected payoff is the highest.
This is called as expected monetary value (EMV). If the manufacturer can get perfect
information about the demand, then we can find out the value or worth of this information. We
can first find out the expected payoff with the perfect information i.e. EPPI by multiplying each
probability with the highest payoff in that row and adding up all these products. Then we can
find out EVPI (Expected value of perfect information) = EPPI – EMV

We can convert the payoff matrix into a regret matrix or opportunity loss matrix by finding the
highest element in each row and subtracting all the elements of the row from this highest
element. Then, we find out the expected regrets corresponding to each strategy by multiplying
the values in each column by the corresponding probabilities and adding them up. Select that
strategy where the expected regret is the lowest.