Solve it all A firm has three investment alternatives. The payoff from each alternative (in thousandRinggit) under each state of nature and its associated probabilities are as given in tablebelow.Economic ConditionStableUp75InvestmentDownD15025D210025D3505050Probabilities0.30.50.2a) Using the expected value approach, which investment is preferred?b) For the investment having a payoff of RM100,000 with probability p and RMO withprobability (1 - p), two decision makers expressed the following indifferenceprobabilities as given in table below.Indifference Probability (p)Decision MakerDecision Maker BProfit (RM)75,00050,00025,000A0.90.70.60.50.20.3N53 Find the most preferred investment for each decision maker using the expectedutility approach.c) Why decision makers A and B do not select the same decision alternative?

Expected value approach reaches to the optimal solution by multiplying the probability with the…

Answered: A firm has three investment…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section9.3: Single-stage Decision Problems

Problem 5P

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A. A company wants to produce a souvenir with a marketing life of six months. Uncertainty surrounds the likely sales volume as well as the fixed costs of the venture as shown below: Sales units Probability Contrn. /unit Probability Fixed cost K7 K5 100 000 0.3 80 000 0.6 60 000 0.1 1.0 0.5 0.5 1.0 Determine the expected value of the contribution K400 000 K450 000 K500 000 Probability 0.2 0.5 0.3 1.0
Option 2: Raise prices by 50%. If this occurs, there is a 75% chance that an Entrepreneur will set up in competition this year. The board’s estimate of its annual profit in this situation would be as follows: 2A: With new competitor 2B: Without new competitor Probability Profit (Sh.) Probability Profit (Sh.) 0.25 150,000 0.5 200,000 0.5 120,000 0.3 150,000 0.25 80,000 0.2 100,000 Option 3: Expand the car park quickly at a cost of Sh. 50,000 keeping prices theSame. The profits are then estimated to be like 2B above, except that the probabilities would be 0.6, 0.3 and 0.1 respectively. Required: Draw a decision tree for the above problem, including all the relevant data. Using expected values analyze the decision tree and recommend the best option to the owners of the car park.
a business owner is planning to strategies his company's growth, he can either buy , rent, or lease a new factory depending on how the business is doing. He was given the following payoff table based on whether the business is doing good or business is slow. Aletnative Business Doing Goood Business Slow Buy 90 -10 Rent 70 40 Lease 60 55 The probability of business doing good is 0.7 and the probability of slow business is 0.3. Using Lapace method, the strategy is: A. Do nothing B. Lease C. Rent D. Buy
c) Koki Nkoana is a writer of romance novels. A movie company and a TV network both want exclusive rights to one of her more popular works. If she signs with the network, she will receive a single lump sum, but if she signs with the movie company, the amount she will receive depends on the market response to her movie. Table 3 presents the payoff matrix (in '000) for Jenny Lind. Table 3: Profit matrix States of Nature Small Box Medium Box Large Box Decisions Office Office Office Sign with Movie Company R200 R1000 3000 Sign with TV Network R900 R900 R900 Prior Probabilities 0.3 0.6 0.1 Applying the decision tree algorithm, determine and advice Koki Nkoana on the best decision to make?
A well-known plastic mould and die manufacturer in Toronto intends to expand internationally in anticipation of strong demand and expansion in the plastic die manufacturing sector. use the table beneath. Using the Maximax, Maximin, and equally likely conditions, assist the business in making the best option in an unclear situation. 0.5 for a highly favourable condition, 0.2 for an average demand, and 0.3 for an unfavourable state are the probabilities linked with the states of nature.a) Choose the course of action that will give Andrew the highest predicted monetary value (EMV).b) Determine the anticipated value of perfect information (EVPI).
A store owner must decide whether to build a small or a large facility at a new location. Demand at a location can be either small or large, which probabilities estimated to be 0.4 and 0.6, respectively. If small facility is built and demand proves to be high, the manager may choose not to expand (payoff=P235,000) or to expand (payoff=P275,000). If a small facility is built and demand is low, there is no reason to expand and the payoff is P220,000. If a large facility is built and demand proves to be low, the choice is to do nothing (P60,000) or to stimulate demand through local advertising. The response to advertising may be either modest or sizable, with their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff grows to P230,000 if the response is sizable. Finally, if a large facility is built and demand turns out to be high, the payoff is P900,000.a.) Draw a decision tree.b.) Determine the expected payoff for each decision and event node.c.)…
. A business owner is planning to strategize his company's growth. He can either buy, rent, or lease a new factory depending on how the business is doing. He was given the following payoff table based on whether the business is doing good or the business is slow. Alternative Business Doing Good Business is Slow Buy 90 -10 Rent 70 40 Lease 60 55 The probability of business doing good is 0.7 and the probability of slow business is 0.3. Using Laplace's method, the best strategy is: Lease Buy Rent Do nothing
A decision maker has prepared the following payoff table. States of Nature Alternative High Low Buy 90 10 Rent 60 35 Lease 50 40 Using the Maximax criterion, what is the best decision and the expected payoff? Best decision Payoff 3 of 5
Following is the payoff table for the Pittsburgh Development Corporation (PDC) Condominium Project. Amounts are in millions of dollars. State of Nature Decision Alternative Strong Demand S1 Weak Demand S2 Small complex, d1 8 7 Medium complex, d2 14 5 Large complex, d3 20 -9 Suppose PDC is optimistic about the potential for the luxury high-rise condominium complex and that this optimism leads to an initial subjective probability assessment of 0.8 that demand will be strong (S1) and a corresponding probability of 0.2 that demand will be weak (S2). Assume the decision alternative to build the large condominium complex was found to be optimal using the expected value approach. Also, a sensitivity analysis was conducted for the payoffs associated with this decision alternative. It was found that the large complex remained optimal as long as the payoff for the strong demand was greater than or equal to $17.5 million and as long as the payoff for…
A retailer must decide whether to build a small or a large facility at a new location. Demand at the location can be either low or high, with probabilities estimated to be 0.4 and 0.6, respectively. If a small facility is built and demand proves to be high, the manager may choose not to expand (payoff = $223,000) or to expand (payoff = $270,000). If a small facility is built and demand is low, there is no reason to expand and the payoff is $200,000. If a large facility is built and demand proves to be low, the choice is to do nothing ($40,000) or to stimulate demand through local advertising. The response to advertising may be either modest or sizable, with their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff is estimated to be only $20,000; the payoff grows to $220,000 if the response is sizable. Finally, if a large facility is built and demand turns out to be high, the payoff is $800,000.Draw a decision tree. Then analyze it to determine the…
Given the following payoff table with the profits ($m), a firm might expect alternative investments (A, B, C) under different levels of interest rate. payoffs as profits states of nature 1(5%) decision 2(7%) 3(9%) alternatives A 14 22 6. B 19 18 11 12 17 15 (a) Which alternative should the firm choose under the maximax criterion? (b) Which option should the firm choose under the maximin criterion? (c) Which option should the firm choose under the LaPlace criterion? (d) Which option should the firm choose with the Hurwicz criterion with a = 0.2? (e) Using a minimax regret approach, what alternative should the firm choose? (f) Economists have assigned probabilities of 0.35, 0.3, and 0.35 to the possible interest levels 1, 2, and 3 respectively. Using expected monetary values, what option should be chosen and what is that optimal expected value? (g) What is the most that the firm should be willing to pay for additional information? Use Expected Regre (h) Use the alternative method to…
eferring to the pay-off table, determine which alternative would be chosen under each of these strategies: Possible future demand in OMR Alternative Low Medium High A 12 15 15 B 10 13 16 C 6 8 19 For the data in above table, assume probabilities of: (low demand) = 0.15, (medium demand) = 0.55, and (high demand) = 0.3. Using a Minimax regret approach the value of the lowest regret is. (Write the number only)

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