Question

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 Expand Production 10 8(2) No Change Reduce Production (9)(4) $ $ 7 $5$ 2 6 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 Manny's 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?

questions 1-5

Answer 1

(1) If he is certain then he will take decision 1 (Expand Production) as it has the maximum profit...

(2) Maximax:

From Decision 1, Maximum profit is $10

From Decision 2, Maximum profit is $7

From Decision 3, Maximum profit is $6

Se, from all the decisions, the maximum profit is $10

So, Decision is Expand Production ...

Maximin:

From Decision 1, Minimum profit is -&2

From Decision 2, Minimum profit is $2

From Decision 3, Minimum profit is -$9

So, from all these profits, maximum is $2

So, Decision is No Change ...

Minimax:

The Regret Table is shown below:

	High Demand	Moderate Demand	Low Demand
Expand Production	0	0	8
No Change	3	3	4
Reduce Production	19	12	0

From Decision 1, Maximum Regret is $8

From Decision 2, Maximum Regret is $4

From Decision 3, Maximum Regret is $19

Se, from all the decisions, the Minimum Regret is $4

So, Decision is No Change ...

(3) Hurwicz:

He is 75% Optimistic

From Decision 1, EMV is 10*0.75 + 8*0.25 = $9.5

From Decision 2, EMV is 7*0.75 + 5*0.25 = $6.5

From Decision 3, EMV is 6*0.75 -4*0.24 = $3.5

The maximum profit is seen in Decision 1 ($9.5)

So, Decision is Expand Production ...

(4)

From Decision 1, EMV is 10*0.35 + 8*0.25 - 2*0.4 = $4.7

From Decision 2, EMV is 8*0.35 + 5*0.25 + 2*0.4 = $4.85

From Decision 3, EMV is -9*0.35 - 4*0.25 + 6*0.4 = -$1.75

The maximum profit is seen in Decision 2 ($4.85)

So, Decision is No Change ...

Part 5 is Coming Soon...