1. Decision Rules. A company is choosing a motorized mechanism for a new toy, a dancing ballerina (TippiToes) that is currently under development. Demand is uncertain. but the company is confident that demand will be: Light (25,000 units), Moderate (100,000 units) or Heavy (150,000) units. The payoff table for each mechanism (in $) is given below. Action: Choice of Mechanism Event Gears and Levers Spring Weights and Pulleys Pneumatic Light 25,000 -10,000 -125,000 -300,000 Moderate 400,000 440,000 400,000 300,000 Heavy 650,000 740,000 750,000 700,000 Questions: (1) Apply Maximax, Maximin, Minimax Regret, and EMV rules (assuming that the probability of Light demand is 0.1, Moderate demand is 0.7, and Heavy demand is 0.2) to decide what mechanism should the company choose? (2) What is the expected value of perfect information? (3) Draw a decision tree to solve this problem.
1. Decision Rules. A company is choosing a motorized mechanism for a new toy, a dancing ballerina (TippiToes) that is currently under development. Demand is uncertain. but the company is confident that demand will be: Light (25,000 units), Moderate (100,000 units) or Heavy (150,000) units. The payoff table for each mechanism (in $) is given below. Action: Choice of Mechanism Event Gears and Levers Spring Weights and Pulleys Pneumatic Light 25,000 -10,000 -125,000 -300,000 Moderate 400,000 440,000 400,000 300,000 Heavy 650,000 740,000 750,000 700,000 Questions: (1) Apply Maximax, Maximin, Minimax Regret, and EMV rules (assuming that the probability of Light demand is 0.1, Moderate demand is 0.7, and Heavy demand is 0.2) to decide what mechanism should the company choose? (2) What is the expected value of perfect information? (3) Draw a decision tree to solve this problem.
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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
Transcribed Image Text:1. Decision Rules.
A company is choosing a motorized mechanism for a new toy, a dancing ballerina
(TippiToes) that is currently under development. Demand is uncertain. but the
company is confident that demand will be: Light (25,000 units), Moderate (100,000
units) or Heavy (150,000) units.
The payoff table for each mechanism (in $) is given below.
Action: Choice of Mechanism
Event
Gears and Levers
Spring
Weights and Pulleys
Pneumatic
Light
25,000
-10,000
-125,000
-300,000
Moderate
400,000
440,000
400,000
300,000
Heavy
650,000
740,000
750,000
700,000
Questions:
(1) Apply Maximax, Maximin, Minimax Regret, and EMV rules (assuming that the
probability of Light demand is 0.1, Moderate demand is 0.7, and Heavy
demand is 0.2) to decide what mechanism should the company choose?
(2) What is the expected value of perfect information?
(3) Draw a decision tree to solve this problem.
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