Question

Styles Styles Parr Question, Given the following decision tree and the maximum expected value strategy, what decision would make? Low demand [.4] $200 Do not expand S223 Expand $270 Do nothine $40 Modest response 1.31 $20 Sizable response [.7) $220 High demand [.6) $200 Question. The selling price/unit delivered at the wholesalers is $80. Formulate the problem of determining an optimum production, storage, shipping plan for the company. Page 1 of 8 1951 words English (United States) E目 尽 p@ Focus + 154% 6

Answer 1

Solution

At node 2,

Since pay-off of 270 for Expand > pay-off of 228 for Do Not Expand,

decision for High Demand is ‘Expand’ with pay-off 270……..................................................………. (1)

So, expected pay-off for Small Facility

= {pay-off for High Demand x probability of High Demand} +

   {pay-off for Low Demand x probability of Low Demand}

= (270 x 0.6) + (200 x 0.4)

= 242 …………………………………………………………....................................................………….. (2)

At node 3,

Expected pay-off for Advertise = {pay-off for Modest Response x probability of Modest Response} +

   {pay-off for Stable Response x probability of Stable Response }

= (20 x 0.3) + (220 x 0.7)

= 150 …………………………………………….................................................………………..……..….. (3)

For the other option of Do Nothing, the pay-off is 40 which is less than 150. Hence,    

Decision at node 3 is: Expand with pay-off 150 …................…………………………………………..…. (4)

Now, expected pay-off for Large Facility

= {pay-off for High Demand x probability of High Demand} +

   {pay-off for Low Demand x probability of Low Demand}

= (200 x 0.6) + (150 x 0.4)

= 180 …………………………………………………………………....................................................….. (5)

Comparing (2) and (5),

Since expected pay-off for Small Facility at 242 > expected pay-off for Large Facility at 180,

Final decision is to go for Small Facility Answer

DONE