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Exam 18: Decision-Making Tools

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Question 21

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A retailer is deciding how many of a certain product to stock. The historical probability distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product costs $8 per unit and sells for $25 per unit. The conditional value for the decision alternative "Stock 3" and state of nature "Sell 1" is

A) 1.4 units.
B) $1 profit.
C) $25 profit.
D) $-8 profit.
E) 25 units.

F) C) and D)
G) A) and C)

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Question 22

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In a decision tree, the expected monetary values are computed by working from right to left.

A) True
B) False

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Question 23

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A retailer is deciding how many of a certain product to stock. The historical probability distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product costs $8 per unit and sells for $25 per unit. The largest conditional value (profit) in the entire payoff table for this scenario is

In the context of decision-making, define state of nature.

A state of nature is an occurrence of a situation over which the decision maker has little or no control.

A(n) ________ is an occurrence or situation over which the decision maker has little or no control.

A toy manufacturer makes stuffed kittens and puppies which have relatively lifelike motions. There are three different mechanisms which can be installed in these "pets." These toys will sell for the same price regardless of the mechanism installed, but each mechanism has its own variable cost and setup cost. Profit, therefore, is dependent upon the choice of mechanism and upon the level of demand. The manufacturer has in hand a forecast of demand that suggests a 0.2 probability of light demand, a 0.45 probability of moderate demand, and a probability of 0.35 of heavy demand. Payoffs for each mechanism-demand combination appear in the table below. $\begin{array} { | l | c | c | c | } \hline \text { Demand } & \text { Wind-up action } & \text { Pneumatic action } & \text { Electronic action } \\\hline \text { Light } & \$ 250,000 & \$ 90,000 & - \$ 100,000 \\\hline \text { Moderate } & 400,000 & 440,000 & 400,000 \\\hline \text { Heavy } & 650,000 & 740,000 & 780,000 \\\hline\end{array}$ Construct the appropriate decision tree to analyse this problem. Use standard symbols for the tree. Analyse the tree to select the optimal decision for the manufacturer.

A(n) ________ is a graphical means of analyzing decision alternatives and states of nature.

The outcome of an alternative/state of nature combination is a(n)

The construction manager for Acme Construction, Inc. must decide whether to build single family homes, apartments, or condominiums. This is not a product-mix problem, but an all-or nothing decision. He will hire workers and rent equipment appropriate for one action only. He estimates annual profits (in thousands of dollars) will vary with population trends as follows: $\begin{array} { | c | c | c | c | } \hline \text { Dwelling type } & \text { Population steady } & \text { Population grows slowly} & \text { Population grows rapidly} \\\hline \text { Single family } & \$ 100 & \$ 90 &\$ 70\\\hline \text { Apartments } & 50 & 170 & 90 \\\hline \text { Condominiums } & - 20 & 100 &220 \\\hline\end{array}$ a. If he uses the maximin criterion, which type of dwellings will he choose to build? Show your supporting calculations. b. If he uses the equally likely criterion, which kind of dwellings will he choose to build? Show your supporting calculations. c. If the construction manager were an optimist, what criterion would he choose? What would be the choice of dwelling for that criterion? Show your supporting calculations.

What is a conditional value?

The expected value of perfect information (EVPI) is the

There are three equally likely states of nature (High, Medium, and Low demand). If the large factory will post profits of $80,000, $65,000, and - $25,000 under these states of nature, respectively, what is the EMV of the factory?

The maximin criterion is pessimistic, while the maximax criterion is optimistic.

Steve Gentry, the operations manager of Baja Fabricators, wants to purchase a new profiling machine (it cuts compound angles on the ends of large structural pipes used in the fabrication yard). However, because the price of crude oil is depressed, the market for such equipment is down. Steve believes that the market will improve in the near future and that the company should expand its capacity. The table below displays the three equipment options he is currently considering, and the profit he expects each one to yield over a two-year period. The consensus forecast at Baja is that there is about a 30% probability that the market will pick up "soon" (within 3 to 6 months) and a 70% probability that the improvement will come "later" (in 9 to 12 months, perhaps longer). Profit from Capacity Investment (in Dollars) $\begin{array} { | l | c | c | } \hline \begin{array} { l } \text { Equipment Option }\end{array} & \begin{array} { c } \text { Market picks up } \\\text { "soon" } p = 0.30\end{array} & \begin{array} { c } \text { Market picks up } \\\text { "later" } p = 0.70\end{array} \\\hline \text { Manual Machine } & - 120000 & 210000 \\\hline \text { NC Machine } & 140000 & 160000 \\\hline \text { CNC Machine } & 200000 & - 200000 \\\hline\end{array}$ a. Calculate the expected monetary value of each decision alternative. b. Which equipment option should Steve take?

Doing nothing would yield how much profit if favorable market conditions prevail according to the following decision table? $\begin{array} { | l | l | l | } \hline \text { Alternative } & \text { Favorable market } & \text { Unfavorable Market } \\\hline \text { Do Nothing } & \$ 31,000 & - \$ 17,000 \\\hline\end{array}$

Which of the following is not considered a step in the decision-making process?

A tabular presentation that shows the outcome for each decision alternative under the various possible states of nature is called a(n)

The last step in the analytic decision process clearly defines the problem and the factors that influence it.

Describe the meaning of EVPI. Provide an example in which EVPI can help a manager.