Decision Analysis

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Decision Analysis

• Tutorial Answers Week 14

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Question 1
The maximax strategy is the one that gives the
highest payoff (11.000). Thus, high inventory is
our maximax decision. For the minimax strategy
we need 1) to construct the opportunity loss
table, 2) determine the maximum opportunity loss
for each action and 3) select the minimum value
of these opportunity losses.
Opportunity Loss Table
Minimum value of opportunity losses
Thus, our minimax decision is medium inventory
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Question 2
The manager has two available actions on pricing
the contract Low and High. His final decision
will be the action with the highest payoff. The
payoffs can be calculated as follows Low price
payoff (0.410.000)(0.415.000)(0.220.000)
14.000 High price payoff (0.43.000)(0.410.00
0)(0.230.000) 11.200
Hence, the manager should choose the low price
for the contract
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Question 3
The marketing dept has two available actions
regarding the investment level Low, Medium and
High. Once again,the final decision will be the
action with the highest payoff Low inv payoff
(0.2300.000)(0.5400.000)(0.3500.000)410.000
Medium inv payoff (0.2(-100.000))(0.5900.000)
(0.31.000.000)730.000 High inv payoff (0.2
(-400.000))(0.5300.000)(0.33.000.000)970.000
Hence, the marketing dept must choose the high
level of investment
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Question 4
E(1500) (0.2750) (0.4750) (0.4750)750
E(2000) (0.2600) (0.41000)
(0.41000)920 E(2500)(0.2450) (0.4850)
(0.41250)930 Perfect information (0.2750)
(0.41000) (0.41250) 1050 EVPI 1050-930
120, So 120 is the maximum
amount the manager should pay
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Question 5 - Basic Tree
Good
0
No check
Defect
-60
inspect
-16
-20
Inspect
-4
Good
Test
Positive
use
-64
inspect
-20
neutral
Good
-4
use
-64
Negative
Defect
-20
inspect
-4
Good
use
-64
Defect
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Question 5 - Posterior Probabilities
Probability
0.7
0.3
P(good/ ve) 0.35 / 0.38 0.92 P(faulty/ ve)
0.03/0.38 0.08 P(good/ neutral) 0.21 / 0.3
0.7 P(faulty/ neutral) 0.09/0.3 0.3 P(good/
-ve) 0.14 / 0.32 0.44 P(faulty/ -ve)
0.18/0.32 0.56
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Question 5 - With Probabilities
Good (0.7)
0
-18
No check
Defect (0.3)
-60
-15.74
inspect
-16
-20
Inspect
-4
Good (0.92)
-8.8
Test
Positive (0.38)
-8.8
use
-64
Defect (0.08)
inspect
-20
-15.74
-20
neutral (0.3)
Good (0.7)
-4
-22
use
-64
Negative (0.32)
Defect (0.3)
-20
inspect
-4
Good (0.44)
-20
-37.6
use
-64
Defect (0.56)