Question

Decision Theory: Marlow Manufacturing | BUS216 REV SP19 Marlow Manufacturing's CEO Manny Marlow is trying to make a decision about their best-selling product, Air in a Jug. Their 3 alternatives are to expand production, reduce production or make no change in their level of production. Marlow's market research department has been working with the sales reps and have determined the potential payoffs for their 3 alternatives under 3 potential market conditions. This information has been used to construct the payoff table shown below High Moderate Low Demand Demand Demand 8 Expand Production 10 No Change (2 Reduce Production $ (9)s (4) S6 1. If Manny is certain which market condition will exist, what will his decision be? 2. If Manny is uncertain which state of nature will occur, what will be his decision under each of the following criterion? a. Maximax b. Maximin c. Minimax Regret 3. CEO, Manny Marlow is a pretty optimistic guy and when asked he indicated that he is 75% certain that things will go well for his company. Use Mannys degree of optimism to determine the best alternative using the Hurwicz Criterion. 4. Information has been obtained regarding demand in the market. This market research has determined that the probability of high demand is 35% and the probability of low demand is 40%. What is the EMV of Manny's 3 alternatives and of the three, which is the best decision? 5. Marlow's CFO, Penny Pincher has learned that some new information has become available that will allow Marlow Manufacturing to know which market condition will occur. She goes to Manny with this news and he asks her how much such information will cost. What is the maximum amount Manny should pay for such information?

1-5

Answer 1

1

If Manny knew the perfect information about the market then his decision will be

Expand production when demand is high. No change when demand is high and reduce production when demand is low.

2

a.

In case maximax we need to choose the maximum value of each decision and then choose the decision with the maximum value among them. The maximum values for each decision are 10, 7 and 5. The maximum out of them is 10 by expanding production.

The decision will be to expand production.

b.

In case of maximin, we need to determine the minimum value for each decision and then choose the maximum value among them. The minimum values are (2), 2, and (9) for each decision. The maximum among them is 2 when we do not change.

The decision will to not change production.

c.

In minimax regret, we first need to create a regret table. This is the difference between maximum value and the value in a column. The regret table is shown below.

	High	Moderate	Low
Expand	0	0	8
No change	3	3	4
Reduce	19	12	0

Here first choose the maximum regret value for each decision. They are 8, 4, and 12. Among them the minimum is 4. Thus the decision will be to not change production.