c
c









3-5.

1.What techniques are used to solve decision ±making problems under uncertainty?

a. Maximax (optimistic)

b. Maximin (pessimistic)

c. Criterion of realism (Hurwicz)

d. Equally likely (Laplace)

e. Minimax regret

2. Which technique results in optimistic decision?

a. The decision criterion locates the alternative with the highest possible gain; it has been
called an optimistic decision criterion.

3. Which technique results in a pessimistic decision?

a. This decision criterion locates the alternative that gives the best of the worst payoff,
and thus it has been called a pessimistic decision criterion.

3-6.

Define O O
O ± The amount you would lose by not picking the best alternative. For
any state of nature, this is the difference between the consequences of any alternative and the
best possible alternative.

What decision ±making criteria are used with an opportunity loss table?

Minimax regret criterion is based on opportunity loss

3-7. What information should be placed on a decision tree?

1.p Define the problem

2.p List the possible outcomes
3.p Identify the possible outcomes
4.p List the payoff of each combination of alternatives and outcomes
5.p Select a mathematical decision theory model
6.p Apply the model and make decision
3-8.

Describe how you would determine the best decision using the EMV criterion with a decision
tree.



3-16. Avrat Singh is the principal owner f Murugan Oil, Inc. After quitting his university
teaching job, Avrat has been able to increase his annual salary by a factor of over ! . At the
present time, Avrat is forced to consider purchasing some more equipment for Murugan Oil
because of competition. His alternatives are shown in the following table:

Avrat decides that his alternatives are to

hp  (environments)
hp 4!! ( uncertainty)
hp
"##

3-18. The ÷

 is an expensive oil newsletter to which many oil giants subscribe, including
Avrat Sing. In the last issue, the letter described how the demand for oil products would be
extremely high. Apparently, the American consumer will continue to use oil products even if the
price of the Lubricant states threat the chances of a favorable market for oil products was 70%,
while the chance of an unfavorable market was only 30%.

 
OO  
O

 

  O .

p What decision model should be used? 4
O


 4  O


b.p What is the optimal decision? 
 
  
!
c.p Avrat believes that the $300,000 figures for the Sub 100 with a favorable market are too
high. How much lower would this figure have to be for Avrat to change his decision
made in part b? $7143 or lower
3-19. Shir Khan is considering investing some money that he inherited. The following pay off
table gives the profits that would be realized during the next year for each of three investment
alternatives Shir is considering State of Nature

Decision Good Poor

Alternative Economy Economy

Stock Market 80,000 -20,000

Bonds 30,000 20,000

CDs 23,000 23,000

Probability 0.5 0.5

a.p What decision would maximize expected profits?

EVPI = Expected value with perfect information ± maximum EMV
1.p The best alternative for the state of nature ³favorable market´ is build in the Stock
Market with a payoff of 80,000. The alternative for the state of nature ³unfavorable
market´ is ³do nothing´, with a payoff of $0.
EVwPI = ($80,000)(0.5) + ($0)(0.5)= $40,000
Thus, if we had perfect information, the payoff would average $40,000
b.p What is the maximum amount that should be paid for a perfect forecast of the economy?

1.p The maximum, EMV without additional information is $30,000

Therefore, the increase in EMV is
EVPI = (expected value with perfect information) ± (maximum EMV)
= $80,000 - $30,000
= $50,000