SHER-E-BANGLA AGRICULTURAL

UNIVERSITY

Assignment on
“Direct Fresh limited”
Course Title: E-Business
Course Code: AGBM 329

Submitted to:
Md. Rashidul Hasan
Associate Professor, Dept. Of Agribusiness and Marketing
Sher-e-Bangla Agricultural University

Submitted by:
Md. Aulad Hossain (19-09844)
Degree Name: B.Sc. Agricultural Economics
Faculty: Agribusiness Management
Department: Agricultural Economics
Level: 3, Semester: Ⅰ

Submission Date: 24th May, 202

Suppose you have 10 metric tons of litchi from your land. You have two choices: either you can
sell or keep the litchi for household and popular consumption. For sale, you can target the market
of Dhaka city and the market of the Rangpur division to supply the litchi. You have a payoff
table as below:

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market
Dhaka City 1000000 -600000
Rangpur Division 500000 -250000
Household and Popular 0 0
Consumption

1. Which option will you choose under an uncertain business situation (Optimistic, Pessimistic,
the criterion of realism, Laplace & minimax regret)? You can assume 𝛼 = 0.4,0.7 for assessing
the criterion of realism.
2. Estimate the EMV considering the 𝛼 = 0.4,0.65 and prove that your option can change when
the value of 𝛼 (𝑎𝑙𝑝ℎ𝑎) changes.
3. Estimate the EOL considering the α=0.3,0.6,0.8 and prove that your option can change when
the value of α (alpha) changes.

Answer

Question Number 1:
As we know that when several states of nature exist and a manager cannot assess the outcome
probability with confidence or when virtually no probability data are available, the environment
is called decision making under uncertainty. Several criteria exist for making decisions under
these conditions. And they are_

● Optimistic
● Pessimistic
● Criterion of realism
● Equally likely
 ● Minimax regret

Optimistic
In using the optimistic criterion, the best (maximum) payoff for each alternative is considered
and the alternative with the best (maximum) of these is selected. As we can see, the maximum
payoff among the best payoff (Maximax) is tk. 1000000 of Dhaka city in a favorable market. So,
in optimistic criteria, my decision is to supply litchi in Dhaka city.

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market Maximum in a Row

Dhaka City 1000000 -600000 1000000 Maximax

Rangpur Division 500000 -250000 500000
Household and 0 0 0
Popular Consumption

Pessimistic
As we know, in pessimistic criteria, the worst (minimum) payoff for each alternative is
considered and the alternative with the best (maximum) of these is selected. As we can see, the
best among the worst payoff (Maximin) is tk. 0 of Dhaka city in Household and Popular
Consumption. So, in pessimistic criteria, my decision is to keep the litchi for Household and
Popular Consumption.

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market Minimum in a Row
Dhaka City 1000000 -600000 -600000
Rangpur Division 500000 -250000 -250000
Household and 0 0 0 Maximin
Popular Consumption

Criterion of Realism
The criterion of realism (the Hurwicz criterion) is a compromise between an optimistic and a
pessimistic decision. To begin with, a coefficient of realism (α) is selected. Then weighted
average is computed as follows: (The option with maximum value of the weighted average is
selected)

Weighted average = α (Best in row) + (1 – α) Worst in row

The given coefficient (α) here is 0.4 and 0.7.

Considering alpha (α) =0.4,

Weighted average (Dhaka City) = 0.4 × 1000000 + (1 – 0.4) (-600000)

= 400000 – 360000
= 40000
Weighted average (Rangpur Division) = 0.4 × 500000 + (1 – 0.4) (-250000)
= 200000 – 150000
= 50000
Weighted average (Household and Popular Consumption) = 0.4 × 0 + (1 – 0.4) × 0
=0

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market Criterion of Realism or
Weighted Average
(α=0.4)
Dhaka City 1000000 -600000 40000
Rangpur Division 500000 -250000 50000 Realism
Household and 0 0 0
Popular Consumption

From the above we can see that the maximum weighted average is 50000 when the value of
alpha (α) =0.4. So, at this condition my decision is to sell the litchi in Rangpur Division.

Considering alpha (α) = 0.7,

Weighted average (Dhaka City) = 0.7 × 1000000 + (1 – 0.7) (-600000)
= 700000 – 180000
 = 520000
Weighted average (Rangpur Division) = 0.7 × 500000 + (1 – 0.7) (-250000)
= 350000 – 75000
= 275000
Weighted average (Household and Popular Consumption) = 0.7 × 0 + (1 – 0.7) × 0
=0

STATE OF NATURE Criterion of Realism or

Weighted Average
Alternatives Favorable Market Unfavorable Market
(α=0.7)
Dhaka City 1000000 -600000 520000 Realism
Rangpur Division 500000 -250000 275000
Household and Popular 0 0 0
Consumption

From the above we can see that the maximum weighted average is 520000 when the value of
alpha (α) =0.7. So, at this condition my decision is to sell the litchi in Dhaka City.

Laplace
This criterion uses all the payoffs for each alternative. This involves finding the average payoff
for each alternative, and selecting the alternative with the best or highest average. The equally
likely approach assumes that all probabilities of occurrence for the states of nature are equal, and
thus each state of nature is equally likely.

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market Row Average

Dhaka City 1000000 -600000 200000 Laplace

Rangpur Division 500000 -250000 125000
Household and 0 0 0
Popular Consumption
From the above table, it is clear that the highest average is tk. 20000 and the alternative is Dhaka
City. So, in Laplace criteria, my decision is to sell the litchi in Dhaka City.

Minimax Regret
The next decision criterion is Minimax Regret. Minimax regret criterion is based on opportunity
loss. Opportunity loss for any state of nature, or any column, is calculated by subtracting each
payoff in the column from the best payoff in the same column.

Determining Opportunity Losses

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market
Dhaka City 1000000-1000000 0-(-600000)
=0 =600000
Rangpur Division 1000000-500000 0-(-250000)
=500000 =250000
Household and Popular 1000000-0 0-0
Consumption
=1000000 =0

Opportunity Loss Table

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market
Dhaka City 0 600000
Rangpur Division 500000 250000
Household and Popular 1000000 0
Consumption
In order to make a decision which alternative is suitable, first we need to find the maximum
(worst) opportunity loss for each alternative. Next, looking at these maximum values, we pick
that alternative with the minimum (or best) number.

Decision

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market Maximum in a Row

Dhaka City 0 600000 600000

Rangpur Division 500000 250000 500000 Minimax
Household and 1000000 0 1000000
Popular Consumption

From the above table, it is clear that the alternative Rangpur Division comes with the least
opportunity cost. So, my decision is to sell litchi in Rangpur Division.

Question Number # 02
Estimating EMV when α=0.4

EMV (Dhaka City) = 0.4 × 1000000 + 0.6(-600000)

= 40000
EMV (Rangpur Division) = 0.4 × 500000 + 0.6(-250000)
= 50000
EMV (Household and Popular Consumption) = 0.4 × 0 + 0.6 × 0
=0
 STATE OF NATURE
Alternatives Favorable Market Unfavorable Market EMV (α=0.4)

Dhaka City 1000000 -600000 40000

Rangpur Division 500000 -250000 50000
Household and 0 0 0
Popular Consumption

Estimating EMV when α=0.65

EMV (Dhaka City) = 0.65 × 1000000 + 0.35(-600000)

= 440000
EMV (Rangpur Division) = 0.65 × 500000 + 0.35(-250000)
= 237500
EMV (Household and Popular Consumption) = 0.65 × 0 + 0.35 × 0
=0

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market EMV (α=0.65)

Dhaka City 1000000 -600000 440000

Rangpur Division 500000 -250000 237500
Household and 0 0 0
Popular Consumption

Question Number # 3
From (1) we get the opportunity loss table as below
 STATE OF NATURE
Alternatives Favorable Market Unfavorable Market
Dhaka City 0 600000
Rangpur Division 500000 250000
Household and 1000000 0
Popular Consumption

Considering the value of alpha (α)=0.3, we get the Expected Opportunity Loss as below

EOL (Dhaka City) = 0.3 × 0 + 0.7 × 600000

= 420000
EOL (Rangpur Division) = 0.3 × 500000 + 0.7 × 250000
= 325000
EOL (Household and Popular Consumption) = 0.3 × 1000000 + 0.7 × 0
= 300000

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market EOL (α=0.3)

Dhaka City 1000000 -600000 420000

Rangpur Division 500000 -250000 325000
Household and 0 0 300000
Popular Consumption
Considering the value of alpha (α)=0.6, we get the Expected Opportunity Loss as below

EOL (Dhaka City) = 0.6 × 0 + 0.4 × 600000

= 240000
EOL (Rangpur Division) = 0.6 × 500000 + 0.4 × 250000
= 400000
EOL (Household and Popular Consumption) = 0.6 × 1000000 + 0.4 × 0
= 600000

STATE OF NATURE
Alternatives Favorable Market Unfavorable Market EOL (α=0.6)

Dhaka City 1000000 -600000 240000

Rangpur Division 500000 -250000 400000
Household and 0 0 600000
Popular Consumption

Considering the value of alpha (α)=0.8, we get the Expected Opportunity Loss as below

EOL (Dhaka City) = 0.8 × 0 + 0.2 × 600000

= 120000
EOL (Rangpur Division) = 0.8 × 500000 + 0.2 × 250000
= 450000
EOL (Household and Popular Consumption) = 0.8 × 1000000 + 0.2 × 0
= 800000
 STATE OF NATURE
Alternatives Favorable Market Unfavorable Market EOL (α=0.8)

Dhaka City 1000000 -600000 120000

Rangpur Division 500000 -250000 450000
Household and 0 0 800000
Popular Consumption

Sensitivity Analysis
EMV (Dhaka City) = 1000000p – (1-p) 600000
= 1000000p + 60000p – 600000
= 1600000p – 600000
EMV (Rangpur Division) = 500000 p – (1-p) 250000
= 500000p + 250000p – 250000
= 7500000p – 250000
EMV (Household and Popular Consumption) = 0 p + (1-p) 0
=0
 EMV
1000000

800000

600000

400000

200000

0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
-200000

-400000

-600000

-800000

-1000000

Probability

EMV (Dhaka City)

EMV (Rangpur Division)

EMV (Household and Popular Consumption)