Spreadsheet Modeling & Decision Analysis: A Practical Introduction To Business Analytics, Loose-leaf Version
8th Edition
ISBN: 9781337274852
Author: Ragsdale, Cliff
Publisher: South-Western College Pub
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Letz Products has two decisions to make, with the second decision dependent on the outcomeof the first. The company intends to build a new plant. Letz has the option of conducting itsown marketing research survey for which the results will either be positive or negative. Theinformation from this survey could help it decide whether to build a large plant, to build a smallplant, or not to build at all. Letz recognizes that although such a survey will not provide it withperfect information, it may be extremely helpful.
Using the image explain to your client (Letz) what the above decision tree shows. You arerequired to show all working.
The following payoff table shows the profit for a decision problem with two states of nature and two decision alternatives.
Decision Alternative
State of Nature
$1
d₁
d₂
(a) Suppose P(s₁) = 0.2 and P(5₂) = 0.8. What is the best decision using the expected value approach?
The best decision is --?--
with an expected value of
12
$₂
6
3
5
(b) Perform sensitivity analysis on the payoffs for decision alternative d₂. Assume the probabilities are as given in part (a), and find the range of payoffs under states of natures, and so that will keep the solution found in part (a) optimal.
As long as the payoff for s₁ under d₁ is --?--
, then the solution found in part (a) will be optimal.
then the solution found in part (a) will be optimal.
As long as the payoff for s₂ under d₁ is --?--
Is the solution more sensitive to the payoff under state of nature s₁ or 5₂?
O $₁
0 5₂
7. Consider the following decision table, which Joe Blackburn has developed for Vanderbilt Enterprises:
States of Nature
Decision Alternatives
Probability:
0.35
0.25
0.40
Low
Medium
High
A
$35
$80
$65
B
$85
$50
$70
C
$55
$70
$75
D
$70
$85
$65
E
$70
$75
$85
Part 2
The alternative that provides Blackburn the greatest expected monetary value
(EMV
LOADING...
)
is
▼
D
E
A
B
C
The EMV for this decision is
$_______(enter your answer as a whole number).
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