Question

The following payoff table shows the profit for a decision problem with two states of nature and two decision alternatives State of Nature Decision Alternative 1 2 d1 10 1 d2 (a) Suppose P(s1)-0.2 and P(sz)-0.8. What is the best decision using the expected value approach? Round your answer in one decimal place v, with an expected value of The best decision is decision alternative d2 3.2 (b) Perform sensitivity analysis on the payoffs for decision alternative di. Assume the probabilities are as given in part (a), and find the range of payoffs under states of nature si and s2 that will keep the solution found in part (a) optimal. Is the solution more sensitive to the payoff under state of nature si or s2? Round your answer in two decimal places. The solution is more sensitive to s2 as an increment of 2.8 for dı(sz) causes a break even between the decision alternatives, whereas it 2to provide the same effect for di(s1) takes an increment of

Answer 1

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