Question

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(6) A manager is deciding whether or not to build a small facility. Demand is uncertain and can be either at a high or low level. If the manager chooses a small facility and demand is low, the payoff is $360. If the manager chooses a small facility and demand is high, the payoff is $100. On the other hand, if the manager chooses a large facility and demand is low, the payoff is-S200, but If demand is high, the payoff is $600. Develop a payoff table below. Develop a regret table below. Low Regret Table Low High Payoff Table Small Small Large Large What would be the best decision using the Minimax Regret criterion? (7) Suppose that the probability of low demand is 0.4. (a) What is the maximum Expected Monetary Value (EMV)? EMV(Small) EMV(Large) - What is the maxdmum EMV? (b) What is the Expected Value of Perfect Information (EVPIJ? Hint: EVPI = EVWPI - maximum EMV. (8) Problem 3-33 (from textbook, page 106). Please show your calculations. (a) Complete the following payoff table: Alternative Win big Win small Go to court Settle Probability 0.4 0.3 b) If Techno wished to maximize the expected gain (EMV), should they accept the settlement offer? EMVIGo to court) EMV(Settle) What is the maximum EMV? Should they accept the settlement offer? Yes/No.

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Answer 1

ten pay off table. pay off table Low High. Small $360 $ 100, Large. – $200 $600. Maxi max criterion involues taking being the maximum value for each. V column strategy & then waking the makimum of these column maximums The corresponding stategy is chosen ? as the best. Regret Table. Low Hegh small $0 $260 tage. – $800 $ 0. Decision using minimax zegset table. ~ Small facility with cow demand.

(7) A Smail Large Probability Low $360 - $200 0.4 High dloo &600 0-6 EMV $204 $280. Emu (Small) = 0.4x360 + 100x0.6 = $204. Emullazge) = 0.6 X GW = $360 - $80 - $200X0 y $280 Maximum EMU $280 B) EVPI = EVEWPI - maximum Emu. EXWPI = $36080.4 + 0.6x$60 = $1447 360 - $504 EUPI = $504- $280 = $224