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WK 3 Session 7 9 Exercise 3

This document contains 4 exercises involving decision theory models and expected monetary value (EMV) calculations. The first exercise provides a payoff table for a concessionaire and asks to calculate the alternative with the greatest EMV and the expected value of perfect information. The second exercise gives a payoff matrix for a transport company purchasing robots and asks which alternative they should take. The third exercise provides sales probabilities for a fruit stand and asks to calculate marginal profit/loss and probability. The fourth exercise gives profit amounts for a company's product options and asks to calculate the EMV and expected opportunity loss of each decision, compare the results, and calculate the expected value of perfect information.

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Lian Emerald Smith
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252 views2 pages

WK 3 Session 7 9 Exercise 3

This document contains 4 exercises involving decision theory models and expected monetary value (EMV) calculations. The first exercise provides a payoff table for a concessionaire and asks to calculate the alternative with the greatest EMV and the expected value of perfect information. The second exercise gives a payoff matrix for a transport company purchasing robots and asks which alternative they should take. The third exercise provides sales probabilities for a fruit stand and asks to calculate marginal profit/loss and probability. The fourth exercise gives profit amounts for a company's product options and asks to calculate the EMV and expected opportunity loss of each decision, compare the results, and calculate the expected value of perfect information.

Uploaded by

Lian Emerald Smith
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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D0010

Exercise 3
Decision Theory Models

I. Compute for the following

1. A concessionaire for the local ballpark has developed a table of conditional values for
the various alternatives (stocking decision) and states of nature (size of crowd).

STATES OF NATURE
(size of crowd)
Alternatives Large Averag Small
e
Large Inventory $22,00 $12,00 $2,0
0 0 00
Average $15,00 $12,00 $6,000
Inventory 0 0
Small Inventory $ $ $5,000
9,000 6,000

If the probabilities associated with the states of nature are 0.30 for a large crowd,
0.50 for an average crowd, and 0.20 for a small crowd, determine:

(a) The alternative that provides the greatest expected monetary value (EMV)
(b) The expected value of perfect information (EVPI)

2. Identify which alternative Goleb Transport must take.

George Goleb is considering the purchase of two types of industrial robots. The
Rob1 (alternative 1) is a large robot capable of performing a variety of tasks, including
welding, painting, etc. The Rob2 (alternative 2) is a smaller and slower robot, but it has
all the capabilities of Rob1. The robots will be used to perform a variety of operations on
large industrial equipment. Of course, George can always do nothing and not buy any
robots (alternative 3). The market for the repair could be either favorable (event 1) ore
unfavorable (event 2). George has constructed a payoff matrix showing the expected
returns of each alternative and the probability of a favorable or unfavorable market. The
data are presented below.

Event 1 Event 2
Probability
0B 0.6 0.4
Alternative 1 50,000 - 40,000
Alternative 2 30,000 - 20,000
Alternative 3 0 0

Exercise 3 *Property of STI


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D0010

3. Compute for the marginal profit /loss and the probability.

Joes Fresh Fruit

Joe Castillo owns and operates a large fresh fruit stand in Knoxville,
Tennessee, fresh greens are his primary produce. Each case of green sells for
P15.Joes cost is P5 for each case. Cases that are not sold for P1 a case at the end
of the day to a small grocery store. The probabilities of sales for cases of greens are
as follows:

Daily Sales (Cases)


1B Probability at
this level
5 0.1
6 0.1
7 0.2
8 0.3
9 0.2
10 0.1

4. The ABC Co. is considering a new consumer product. They believe that there is a
probability of 0.4 that the XYZ Co. will come out with a competitive product. If ABC
adds an assembly line for the product and XYZ does not follow with a competitive
product, their expected profit is $40,000; if they add an assembly line and XYZ does
follow, they still expect $10,000 profit. If ABC adds a new plant addition and XYZ
does not produce a competitive product, they expect a profit of $600,000; if XYZ does
compete for this market, ABC expects a loss of $100,000.

(a) Determine the EMV of each decision

(b) Determine the EOL of each decision

(c) Compare the results of a and b

(d) Calculate the EVPI

Exercise 3 *Property of STI


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