State of Nature Alternatives 1 2 3
State of Nature Alternatives 1 2 3
The following payoff table shows profit for a decision analysis problem with two
decision alternatives and three states of nature:
State of Nature
Alternatives 1 2 3
A 250 100 25
B 100 100 75
a. If the decision maker knows nothing about the probabilities of the three
states of nature, what is the recommneded decision using the optimistic,
conservative, and minimax regret approaches?
Long-Run Demand
Plant Size Low Medium High
Small 150 200 200
Large 50 200 500
3. Howard Weiss, Inc., is considering building a sensitive new radiation scanning device. His manage
that the ATR Co. will come out with a competitive product. If Weiss adds an ssembly line for the pro
competitive product. Weiss's expected profit is $40,000; if Weiss adds an assembly line and ATR fol
If Weis adds a new plant addition and ATR does not produce a competitive product, Weiss expects
this market, Weiss expects a loss of $100,000
a. Determine the EMV of each decision
b. Commpute the expected value of perfect information
c. Recommned a decision based on the use of the optimistic, conservative,
and minimax regret approaches.
ning device. His managers believe that there is a probability of 0.4
ssembly line for the product and ATR Co. does not follow with a
sembly line and ATR follows suit, Weiss still expects $10,000 profit.
product, Weiss expects a profit of $600,000; if ATR does compete for
ANSWERS
State of Nature
Alternatives 1 2 3
A 250 100 25
B 100 100 75
State of Nature
Alternatives 1 2 3
A 250 100 25
B 100 100 75
State of Nature
Alternatives 1 2 3
A 250 100 25
B 100 100 75
Regret Table
Alternatives 1 2 3
A 0 0 50
B 150 0 0
HIGH HIGH
"BEST "
Maximax (Optimistic)
250 OPTIMISTC = A
100
LOW HIGH
"BEST OF THE WORST"
Maximin (Conservative)
25
75 CONSERVATIVE = B
AVE HIGH
Minimax
125
91.6666666666667 AVERAGE = HIGHER
50 MINIMAX = A
150
Long-Run Demand
Plant Size Low Medium High Optimistic
Small 150 200 200 200
Large 50 200 500 500
Long-Run Demand
Plant Size Low Medium High Conservative
Small 150 200 200 150
Large 50 200 500 50
Long-Run Demand
Plant Size Low Medium High Minimax
Small 150 200 200 183.33333333
Large 50 200 500 250
States of Nature
States of Nature
tates of Nature
ATR Co. doesn't
compete in market EVwPI
40,000 0.4 (10,000) + 0.6(600,000)
600,000 364,000
0.6
364,000 - 320,000
.6 (600,000)