DECISION SCIENCE

TUTORIAL WORKSHEET # 2 DECISION ANALYSIS

Problem # 1
T. Bone Puckett, has acquired a textile company on Marcus Garvey Drive and is considering the capacity of the plant to satisfy future orders. Given the following conditional value table, determine the appropriate decision under uncertainty i.e., the decision maker does not know the probability of the outcomes using a) Maximax b) Maximin c) Laplace (Equally Likely) d) Minimax Regret _______________________________________________________________________ _ States of Nature ________________________________________ Very Favorable Average Unfavorable Alternatives Market Market Market Build new plant $350,000 $240,000 -$300,000 Subcontract $180,000 $ 90,000 -$ 20,000 Overtime $110,000 $ 60,000 -$ 10,000 Do nothing $ 0 $ 0 $ 0

Problem #2
A Farmer in St. Elizabeth must decide which crop to plant next year on his land: corn, peanuts, or red peas. The return from each crop will be determined by whether a new trade bill with CARICOM is passed in Parliament. The profit the farmer will realize from each crop, given the two possible results on the trade bill is shown in the following payoff table: ___________________________________________________ Trade Bill _____________________________________ Crop Pass Fail ____________________________________________________ Corn $35,000 $ 8,000 Peanuts 18,000 12,000 Red Peas 22,000 20,000 ___________________________________________________ Determine the best crop to plant, using the following information: a) Maximax b) Maximin c) Minimax Regret d) Equal likelihood Problem # 3. 1

A local real estate investor in Montego Bay is considering three alternative investments: a guest house, a restaurant, or a night club. Profits from the guest house or restaurant will be affected by the availability of gasoline and the number of tourists; profits from the night club will be relatively stable under any conditions. The following table shows the profit or loss that could result from each investment: Gasoline Availability _______________________________________________________ Investment Guest house Restaurant Night Club Shortage -$8,000 2,000 6,000 Stable Supply $15,000 8,000 6,000 Surplus $20,000 6,000 5,000

Determine the best investment, using the following decision criteria. a) Maximax b) Maximin c) Minimax Regret d) Equally Likely

Problem # 4
Maria Rowe is considering the possibility of opening a small dress shop on Fairbanks Avenue, a few blocks from the university. She has located a good mall that attracts students. Her options are to open a small shop, a medium-sized shop, or no shop at all. The market for a dress shop can be good, average, or bad. The probabilities for these three possibilities are 0.2 for a good market, 0.5 for an average market, and 0.3 for a bad market. The net profit or loss for the medium-sized and small shops for the various market conditions are given in the table below. Building no shop at all yields no loss and no gain. What do you recommend? ALTERNATIVE Small Shop Medium-sized Shop No Shop GOOD MARKET ($) 75,000 100,000 0 AVERAGE MARKET ($) 25,000 35,000 0 BAD MARKET ($) - 40,000 - 60,000 0

Problem # 5
2

The Big Traders Company is going to introduce one of three new products: a widget, a hummer, or a nimnot. The market conditions (favourble, stable, or unfavourable) will determine the profit or loss the company realizes, as shown in the following payoff table: ___________________________________________________ Market Conditions ________________________________________ Favorable Stable Unfavorable Product .2 .7 .1 ____________________________________________________ Widget $120,000 $70,000 $30,000 Hummer 60,000 40,000 20,000 Nimnot 35,000 30,000 30,000 ____________________________________________________

a) Compute the expected value for each decision and select the best one. b) Determine how much the firm would be willing to pay to a market research firm to gain better information about future conditions. Problem # 6 Microcomp is a U.S. based manufacturer of personal computers. It is planning to build a new manufacturing and distribution facility in eith South Korea, China, Taiwan, the Philippines, or Mexico. It will take approximately 5 years to build the necessary infrastructure (roads, etc.,), construct the new facility, and put it into operation. The eventual cost of the facility will differ between countries and will even vary with countries depending on the financial, labor, and political climate, including monetary exchange rates. The company has estimated the facility cost (in $1,000,000s) in each country under three different future economic and political climates, as follows: Economic/Political Climate ________________________________ Decline Same Improve

Country

South Korea 15.2 China Taiwan Philippines Mexico 12.5

21.7 19.0 19.2 22.5 25.0 18.5 17.1 16.8

19.1 17.6 14.9 13.8 21.2

A global economist hired by Microcomp, estimates that the probability that the economic and political climate overseas and in Mexico will decline during the next 5 years is 0.4, the probability that it will remain approximately the same is 0.50, and the probability that it will improve is 0.10. Determine: a) The best country to construct the new facility in and b) The expected value of perfect information Problem #7

a)

Use the Expected Money Value approach to determine the optimal decision based on the information below. STATE OF NATURE Decision S1 S1 S3 Alternative d1 25 19 -2.0 d2 10 16 -8.5 The decision maker has obtained the probability assessments: P( S1 ) = 0.65, P( S2 ) = 0.15 and P( S3 ) = 0.20. Use the data above to calculate the Expected Value of Perfect Information.

b)

Problem #8
Consider the pay-off table below. Assume that the following probabilities are specified for the states of nature. P(1) = 0.1 ; P(2) = 0.4; and P(3) = 0.3 . STATE OF NATURE
4

DECISION S4 d1 d2 D3 d4 a. b. c.

S1 35 27 22 20 21 25 26 25

S1 25 20 21 28

S3 12 18 28 33

Find the decision that maximizes the expected net dollar return. Find the decision that minimizes the expected net dollar return. Use the data above to calculate the Expected Value of Perfect Information.