Final Examination – MANAGEMENT SCIENCE

Instructions: Answer the following questions and show your complete solutions. Highlight your final
answers.

PART A.

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

State of Nature
Decision Alternative S1 S2 S3
D1 250 100 25
D2 100 100 75

a. Construct a decision tree for this problem.

S1 = 250
D1 S2 = 100
Decision S3 = 25

S1 = 100
D2 S2 = 100
S3 = 75
b. If the decision maker knows nothing about the probabilities of the three states of nature,
what is the recommended decision using the optimistic, conservative and minimax
regret approaches?

Decision Maximum Profit Minimum Profit

D1 250 25
D2 100 75
Optimistic approach: select D 1
Conservative approach: D 2
Regret or Opportunity Loss Table:
S1 S2 S3
D1 0 0 50
D1 150 0 0
Maximum regret for D 1 = 50
 Maximum regret for D 2 = 150

2. The following profit table was presented in Problem #1. Suppose that the decision maker
obtained the probability assessments P(s 1) = 0.65, P(s2) = 0.15 and P(s3) = 0.20. Use the
expected value approach to determine the optimal decision.

State of Nature
Decision Alternative S1 S2 S3
D1 250 100 25
D2 100 100 75

Answer:

EXPECTED VALUE

Decision Alternative S1 (0.65) S2 (0.15) S3 (0.20) EV

D1 162.50 15.00 5.00 182.50

D2 65.00 15.00 15.00 95.00

3. The following profit payoff table was presented in Problems 1 & 2:

State of Nature
Decision Alternative S1 S2 S3
D1 250 100 25
D2 100 100 75

The probabilities for the states of nature are P(s 1) = 0.65, P(s2) = 0.15 and P(s3) = 0.20.

a. What is the optimal decision strategy if perfect information were available?

The optimum strategy under the perfect information is as follows:
D1 when the state of nature is S1
Either D1 or D2 under S2
D2 when the state of nature is S3
b. What is the expected value for the decision strategy developed in part (A)?
S1 S2 S3 EV
EVD 162.50 15.00 15.00 192.50

c. Using the expected value approach, what is the recommended decision without perfect
information? What is its expected value?
 D1 is the recommended decision without perfect information
EXPECTED VALUE
S1 (0.65) S2 (0.15) S3 (0.20) EV
D1 162.50 15.00 5.00 182.50

d. What is the expected value of perfect information?

Expected Value of 192.50 182.50 10.00

Perfect Information

4. Italpinas Development Corporation is considering bidding on a contract for a new office

building complex. The figure below shows the decision tree prepared by one of the
company’s analysts. At node 1, the company must decide whether to bid on the contract.
The cost of preparing the bid is $200,000. The upper branch from node 2 shows that the
company has a 0.80 probability of winning the contract if it submits a bid. If the company
wins the bid, it will have to pay $2,000,000 to become a partner in the project. Node 3
shows that the company will then consider doing market research study to forecast demand
for the office units prior to beginning construction. The cost of this study is $150,000. Node 4
is a chance node showing the possible outcomes of the market research study.

Nodes 5, 6 and 7 are similar in that they are the decision nodes for Italpinas to either build
the office complex or sell the rights in the project to another developer. The decision to build
the complex will result in an income of $5,000,000 if demand is high and $3,000,000 if
demand is moderate. If Italpinas chooses to sell its rights in the project to another developer,
income from the sale is estimated to be $3,500,000. The probabilities shown at nodes 4, 8
and 9 are based on the projected outcomes of the market research study.
 a. Verify Italpinas Development Corporation’s profit projections shown at the ending
branches of the decision tree by calculating the payoffs of $2,650,000 and $650,000 for
first two outcomes.
Outcome 1
Bid -$200,000
Contract -$2,000,000
Market Research -$150,000
b. What is the optimal decision strategy for
High Demand -$5,000,000
Italpinas, and what is the expected profit
$2,650,000
for this project?

EV(node8) = .85(2650) + .15(650) = $2,350,000

EV (node 5) = Max (2350, 1150) = $2,350,000

EV(node9) = .225(2650) + .775(650) = $1,100,000

EV(node6) = Max(1100, 1150) = $1,150,000

EV(node 10) = .6(2800) + .4(800) = $2,000,000

EV(node 7) = Max(2000, 1300) = $2,000,000

EV(node 4) = .6(2350) + .4(1150) = $1,870,000

EV(node3) = Max(1870, 2000) = $2,000,000

EV(node 2) = .8(2000) + .2(-200) = $1,560,000

EV(node 1) = Max(1560, 0) = $1,560,000

5. The following payoff table shows the profit for a decision problem with two states of nature
and two decision alternatives:

State Nature
of
Decision Alternative S1 S2
D1 10 1
D2 4 3

a. Use graphical sensitivity analysis to determine the range of probabilities of state of

nature s1 for which each of the decision alternatives has the largest expected value.
PART B.

1. Have you ever faced a situation wherein you had to take a decision? What are/were your
personal decision criteria? Give an example.
Ex. Deciding where to go to college. Why or why not choose Xavier University? What
are/were the factors considered?
I have faced a situation wherein I had to take a decision which is deciding to college. When I
chose Xavier University, I considered a lot of factors. I chose Xavier University because they
have these programs that facilitate students' formation that probably other schools don't
have. In addition, XU help form its student into individuals and future experts and leaders
who are academically excellent, holistically formed, socially engaged and, globally
competitive. Xavier University totally gives its student a quality education in which internally,
the institution provides programs such as the thesis projects in which it enables students to
work hard and push through their limits in terms of their academic knowledge. The
institution of Xavier University has a specific subject that teaches the students internally on
how to behave responsively and become a model person in which it teaches and help
upholds the Ignatian values to its pupils and form them into good stewards of God. Xavier
University has one of the oldest established student governments and it is one of the
privileges that the institution has given to its students. Through the form of the Student
government, it made some students of the institution to be independent, socially engaging
and be more interactive in terms of services and leadership.

2. What is the essence of Management Science? If yes, in what way? If no, why?

Management science is essential because it helps us about forecasting and in making good
decisions not just in business, but it can also be applied in everyday life. Management is a
purposeful activity, and the team's efforts are to achieve organizational goals. Management
yields to good and effective performance and it does not happen by accident. It happens due
to careful planning, effective organization of available resources and use of them in a way
that produces expected results. Therefore, the success of an organization depends on
effectively guiding, guiding and leading the available human resources to achieve the
organization's goals. Overall, management science helps us to apply scientific principles to
decision making in all spheres of activity