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Chapter 3
Decision Analysis
STATE OF NATURE
Blank FAVORABLE UNFAVORABLE
MARKET MARKET
ALTERNATIVE ($) ($)
Construct a large plant 200,000 −180,000
Construct a small plant 100,000 −20,000
Do nothing 0 0
1. Maximax (optimistic)
2. Maximin (pessimistic)
3. Criterion of realism (Hurwicz)
4. Equally likely (Laplace)
5. Minimax regret
STATE OF NATURE
Blank FAVORABLE UNFAVORABLE Blank
Blank MARKET MARKET ROW AVERAGE
ALTERNATIVE ($) ($) ($)
Construct a large plant 200,000 −180,000 10,000
Construct a small plant 100,000 −20,000 40,000
Blank Blank Blank Equally likely
Do nothing 0 0 0
STATE OF NATURE
FAVORABLE UNFAVORABLE
MARKET MARKET
($) ($)
200,000 − 200,000 0 − (−180,000)
200,000 − 100,000 0 − (−20,000)
200,000 − 0 0−0
STATE OF NATURE
Blank FAVORABLE UNFAVORABLE
Blank MARKET MARKET
ALTERNATIVE ($) ($)
Construct a large plant 0 180,000
Construct a small plant 100,000 20,000
Do nothing 200,000 0
STATE OF NATURE
Blank FAVORABLE UNFAVORABLE MAXIMUM IN
Blank MARKET MARKET A ROW
ALTERNATIVE ($) ($) ($)
Construct a large plant 0 180,000 180,000
Construct a small plant 100,000 20,000 100,000
Blank Blank Blank Minimax
Do nothing 200,000 0 200,000
STATE OF NATURE
Blank FAVORABLE UNFAVORABLE Blank
Blank MARKET MARKET Blank
ALTERNATIVE ($) ($) EMV ($)
Construct a large plant 200,000 −180,000 10,000
Construct a small plant 100,000 −20,000 40,000
Blank Blank Blank Best EMV
Do nothing 0 0 0
Probabilities 0.50 0.50 Blank
And
EVPI = EVwPI − Best EMV
STATE OF NATURE
Blank FAVORABLE UNFAVORABLE Blank
Blank MARKET MARKET Blank
ALTERNATIVE ($) ($) EMV ($)
Construct a large plant 200,000 −180,000 10,000
Construct a small plant 100,000 −20,000 40,000
Do nothing 0 0 0
With perfect information 200,000 0 100,000
Blank Blank Blank EVwPI
Probabilities 0.50 0.50 Blank
20,000
0 = $120,000P − $20,000 P= = 0.167
120,000
USAGE PROBABILITY
10,000 0.40
20,000 0.30
30,000 0.30