QBA03
QBA03
QBA03
Decision Analysis
Decision Analysis
Outcomes (Demand)
Outcomes (Demand)
Outcomes (Demand)
High Moderate Low
Alternative 0.3 0.5 0.2 EOL
Large 0 0 120,000 24,000
plant x0.2
Small 110,000 50,000 20,000 62,000
plant X0.3 x0.5 x0.2
No plant 200,000 100,000 0 110,000
x0.3 x0.5
Outcomes (Demand)
High Moderate Low
Alternative 0.3 0.5 0.2 EOL
Large 0 0 120,000 24,000
plant x0.2
Small 110,000 50,000 20,000 62,000
plant X0.3 x0.5 x0.2
No plant 200,000 100,000 0 110,000
x0.3 x0.5
The right decision under EOL
Large plant $ 24,000
Perfect Information
EVwPI = $110,000
Expected Value of Perfect Information
Sign with TV
$900,000 $900,000 $900,000
Network
Prior
0.3 0.6 0.1
Probabilities
Maryam - How to Decide?
EMVtv =0.3(900,000)+0.6(900,000)+0.1(900,000)
= $900,000
Therefore, using this criteria, Maryam should select the
movie contract.
EVPI Calculation
EVwPI
=0.3(900,000)+0.6(1,000,000)+0.1(3,000,000) = $1,170,000
EMVBest (calculated to be EMVMovie from the previous page)
=0.3(200,000)+0.6(1,000,000)+0.1(3,000,000) = $960,000
EVPI = $1,170,000 - $960,000 = $210,000
Chance
Event 1
node
Decision 1 Event 2
ion
node Decis Event 3
De c
ision
2
Maryam Decision Tree
Kelly Construction
State of Nature
Maximin
Demand Criterion
Alternative
Actions
Low Medium High Min
EVPI 180,000
Q2- A glass factory specializing in crystal is experiencing a substantial bottleneck,
and the firm's management is considering three courses of action:
A) Arrange for subcontracting
B) Construct new facilities
The correct choice depends largely upon demand, which may be low, medium, or
high. Management estimates the respective demand probabilities as 0.1, 0.5, and
0.4. The management estimates the profits when choosing from the two alternatives
(A and B) under the differing probable levels of demand. These profits, in thousands
of dollars are presented in the table below
Subcontracting .5 Medium
$ 50,000
.4
High
$90,000
EMV Low
EMV .1 $ -120,000