BUSN 6250 • Ch.

16 • In-class Exercise
Wes’ Car

This is a Decision Analysis problem that I’ve used at Laurier in the past. You will play the role of
Wes’ older sibling or older friend — he has come to ask your help in making a decision.

Set-up: Wes will be graduating with his BBA from TRU (yay Wes!) and his grandparents are
going to lease a car for him as a graduation gift. He’s narrowed his selection down to 3 dealers,
who offer different monthly lease rates, different mileage allowances, and different charges for
extra kilometers. The following table summarizes this cost data:

While Wes is uncertain about the exact number of kilometers he may drive during the next
three years, he feels the three choices (60K, 75K, 90K) reflect his decision situation.

<use the space below for rough calculations>

BUSN 6250 Notes • © by Prof. Trent Tucker • For TRU student use only [Page 1 of 4]
Step #1 — Complete a Payoff Table for Wes, based on his decision alternatives and possible
outcomes. (I’ve given you the skeleton)

BUSN 6250 Notes • © by Prof. Trent Tucker • For TRU student use only [Page 2 of 4]
Decision Making under uncertainty…

Apply the following decision criteria — which dealer should Wes go with?

Optimistic Approach —

Pessimistic Approach —

Equally Likely (a.k.a. Laplace) —

Hurwicz Criteria (with α = 0.50) —

Minimax Regret Approach —

Decision Making under risk…

After talking with recent graduates, Wes thinks he has a 30% chance of driving 60K during the
lease period, and a 50% chance of driving 75K. Based on this new information and using an
expected value approach, which decision should Wes make?

BUSN 6250 Notes • © by Prof. Trent Tucker • For TRU student use only [Page 3 of 4]
Last step… can you translate the Payoff Table from page 2 into a Decision Tree?

Next class we’ll wrap up Ch. 16 — Decision Analysis — with a discussion of sample information,
Expected Value of Perfect Information (EVPI), and Bayes’ Rule. Come prepared!

BUSN 6250 Notes • © by Prof. Trent Tucker • For TRU student use only [Page 4 of 4]