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8
C H A P T E R
Decision Theory
SOLUTIONS TO DISCUSSION QUESTIONS 8-6. A decision tree is preferred to a decision table when a
number of sequential decisions are to be made. A sequential deci-
AND PROBLEMS
sion situation is one in which the outcome of one decision be-
8-1. The purpose of this question is to make students use a per- comes an important factor in making future decisions. For exam-
sonal experience to distinguish between good and bad decisions. A ple, if a decision maker is considering the possibility of acquiring
good decision is based on logic and all of the available informa- additional information and a decision of whether or not to build a
tion. A bad decision is one that is not based on logic and the avail- new plant, the decision to acquire the new information is made
able information. It is possible for an unfortunate or undesirable first. Then, based on the results of the new information (if it is
outcome to occur after a good decision has been made. It is also gathered), the decision to build the plant is made. Therefore, these
possible to have a favorable or desirable outcome occur after a bad decisions are sequential. One is made before the other.
decision.
8-7. A prior probability is one that exists before additional in-
8-2. The decision-making process includes the following steps: formation is gathered. A posterior probability is one that can be
(1) define the problem, (2) list the alternatives, (3) identify the computed based on prior probabilities and additional information.
possible outcomes, (4) evaluate the consequences, and (5) select
an evaluation criterion and make the appropriate decision. The 8-8. The purpose of Bayesian analysis is to determine posterior
first four steps or procedures are common for all decision-making probabilities based on prior probabilities and new information.
problems. Step 5, however, depends on the decision-making Bayesian analysis can be used in the decision-making process
model used. whenever additional information is gathered. This information can
then be combined with prior probabilities in arriving at posterior
8-3. An alternative is a course of action over which we have
probabilities. Once these posterior probabilities are computed,
complete control. A state of nature is an event or occurrence in
they can be used in the decision-making process as any other prob-
which we have no control. An example of an alternative is decid-
ability value.
ing whether or not to take an umbrella to school or work on a par-
ticular day. An example of a state of nature is whether or not it 8-9. The overall purpose of utility theory is to incorporate a de-
will rain on a particular day. cision maker’s preference for risk in the decision-making process.
8-4. The basic differences between decision-making models 8-10. A utility function can be assessed in a number of different
under certainty, risk, and uncertainty depend on the amount of ways. A common way is to use a standard gamble. With a stan-
chance or risk that is involved in the decision. A decision-making dard gamble, the best outcome is assigned a utility of 1, and the
model under certainty assumes that we know with complete confi- worst outcome is assigned a utility of 0. Then, intermediate out-
dence the future outcomes. Decision-making-under-risk models comes are selected and the decision maker is given a choice
assume that we do not know the outcomes for a particular decision between having the intermediate outcome for sure and a gamble
but that we do know the probability of occurrence of those out- involving the best and worst outcomes. The probability that makes
comes. With decision making under uncertainty, it is assumed that the decision maker indifferent between having the intermediate
we do not know the outcomes that will occur, and furthermore, we outcome for sure and a gamble involving the best and worst out-
do not know the probabilities that these outcomes will occur. comes is determined. This probability then becomes the utility of
the intermediate value. This process is continued until utility val-
8-5. EMV is the expected monetary value. This is the expected
ues for all economic consequences are determined. These utility
return that we would realize if the decision were repeated an infi-
values are then placed on a utility curve.
nite number of times. EVwPI is the expected value with perfect in-
formation. This is the return or value of making the same decision 8-11. When a utility curve is to be used in the decision-making
an infinite number of times when we have perfect or complete in- process, utility values from the utility curve replace all monetary
formation. EVPI is the expected value of perfect information. This values at the terminal branches in a decision tree or in the body of
is simply the difference between EMV and EVwPI. It is the a decision table. Then, expected utilities are determined in the
amount that we would be willing to pay for perfect information. same way as expected monetary values. The alternative with the
highest expected utility is selected as the best decision.
61
6634 CH08 UG 8/23/02 2:20 PM Page 62
8-12. A risk seeker is a decision maker who enjoys and seeks out Using minimum EOL, the best strategy is the small plant.
risk. A risk avoider is a decision maker who avoids risk even if c. EVPI min EOL $134,000. See file P8-16.XLS
the economic payoff is higher. The utility curve for a risk seeker
8-17. a. Decision under uncertainty.
increases at an increasing rate. The utility curve for a risk avoider
b.
increases at a decreasing rate.
8-13. a. Decision making under uncertainty.
Population Population Row
b. Maximax criterion. Same Grows Average
c. Sub 100; $300,000
See file P8-13&14.XLS. Large wing 85,000 150,000 32,500
Small wing 45,000 60,000 7,500
Row Row No wing 0 0 0
Equipment Favorable Unfavorable Maximum Minimum
Sub 100 300,000 200,000 300,000 200,000 c. Best alternative: large wing.
Oiler J 250,000 100,000 250,000 100,000 8-18. a.
Texan 75,000 18,000 75,000 18,000
Weighted
a a
Population Population Average with
maximax maximin
Same Grows 0.75
8-14. Maximin criterion: best alternative: Texan (see table).
Large wing 85,000 150,000 91,250
$18,000. See file P8-13&14.XLS.
Small wing 45,000 60,000 33,750
8-15. a. Decision making under risk—maximize expected No wing 0 0 0
monetary value. See file P8-15.XLS.
b. EMV (Sub 100) 0.7 300,000 0.3 b. Best decision: large wing.
c. No.
(200,000) 150,000
8-19. Profit from each case sold is $(95 45) $50. Loss from
EMV (Oiler J) 0.7 250,000 0.3
each case not sold is $45.
(100,000)
145,000 Demand
EMV (Texan) 0.7 75,000 0.3 Manu- (Cases)
facture
(218,000) (Cases) 6 7 8 9 EMV
47,100
6 300 300 300 300 300
Optimal decision: Sub 100. 7 255 350 350 350 340.5
8-16. a., b. 8 210 305 400 400 352.5
9 165 260 355 450 317
Favorable Unfavorable
Market Market EOL Probabilities 0.1 0.3 0.5 0.1
Large plant (400,000 400,000) 0 (300,000) 180,000 John should manufacture 8 cases of cheese spread. See file
0 300,000
P8-19.XLS for the Excel solution of this problem.
Small plant (400,000 80,000) 0 (10,000) 134,000
320,000 10,000
Don’t build (400,000 0) (0 0) 0 160,000
400,000
Probabilities 0.4 0.6
6634 CH08 UG 8/23/02 2:20 PM Page 63
Market
Size of
First Good Fair Poor Row Row Row Weight
Station Market Market Market Minimum Maximum Average Average
Small 50,000 20,000 10,000 10,000 50,000 20,000 38,000
Medium 80,000 30,000 20,000 20,000 80,000 30,000 60,000
Large 100,000 30,000 40,000 40,000 100,000 30,000 72,000
Very large 300,000 25,000 160,000 160,000 300,000 55,000 208,000
a a a a
maximin maximax equally realism
likely ( 0.80)
a. Maximax decision: very large station. 8-22. EMV for node 1 (0.5) ($100,000) (0.5) ($40,000)
b. Maximin decision: small station. $30,000
c. Equally likely decision: very large station.
d. Realism decision: very large station. PAYOFF
e. Favorable Market (0.5)
$100,000
Opportunity ct 1
tru _$40,000
Loss Table o ns ic
C lin $ 30,000 Unfavorable Market (0.5)
C
Market
Market Row $30,000
Size Good Fair Poor Maximum Do
No
thi
Small 250,000 10,000 0 250,000 ng
$0
Medium 220,000 0 10,000 220,000 EMV for no clinic is $0
Large 200,000 0 30,000 200,000
Very large 0 5,000 150,000 150,000 Choose highest EMV; therefore, construct clinic.
a Note: Slash lines // on the tree indicate branches that are dropped
minimax
from consideration.
f. Minimax decision: very large station.
8-21. a.
8-23. a. Note: The Cost of the market study has been included in the payoffs.
PAYOFF
Favorable Market (0.82)
$ 95,000
CONSTRUCT 2 Unfavorable Market (0.18)
$ _45,000
$ 69,800
5)
v ey (0.5
r $69,800
Su ble
r a
vo _5,000
Fa DO NOT CONSTRUCT
$
1
t Favorable Market (0.11)
uc vey $36,140 $ 95,000
nd ur CONSTRUCT 3
Co et S Unfavorable Market (0.89)
Ne
$ _45,000
Su tive
k
ar
ga
rv (0
M $ 29,600
ey .4
)5
_$5,000
$36,140
_5,000
$
DO NOT CONSTRUCT
Do
No
tC
on
du
$ 100,000
Su
CONSTRUCT CLINIC
rv
$ _40,000
$ 30,000
$30,000
DO NOT CONSTRUCT $ 0
Indicates branch dropped from consideration
Market Favorable
p 7 Market Unfavorable
Sho
all Market Favorable
Sm
Large
6 Market Unfavorable
Shop
y
S tud
ct No Shop
ndu
t Co
No
Do Market Favorable
p 3 Market Unfavorable
Sho
all Market Favorable
Sm
Large
Co
2 Market Unfavorable
nd
y Shop
tud
uc
eS
t
St
bl
ud
ra
vo
y
Fa No Shop
1
Un Market Favorable
fav
ora
ble 5
St h op Market Unfavorable
ud ll S
y ma Market Favorable
S
Large
4 Market Unfavorable
Shop
No Shop
Payoff
$45,000 Favorable Market (0.9)
Large Shop $55,000
2 Unfavorable Market (0.1)
$45,000 –$45,000
No Shop
ey le –$5,000
)
.6
rv rab
(0 $21,000 Favorable Market (0.9)
Su avo
$55,000
Su ark
ey
Large Shop
U ur v
nf e
M
4
av y
–$5,000 –$45,000
ab 4)
le
No Shop
–$5,000
–$10,200 Favorable Market (0.12)
Small Shop $25,000
N
o
–$15,000
r
ve
y
–127
fro
5% Defective (0.1)
P( S1 | S3 )P( S3 ) –$287.00 = (0.05 × 10,000) × (–$0.50) – $37
y
P( S3 | S1 ) =
Bu
a. P( S1 | S3 )P( S3 ) + P( S1 | S4 )P( S4 )
0.8 × 0.5
Bu
= = 0.73
y
1% Defective (0.3)
fro
3% Defective (0.4)
2 –$150.00
P( S2 | S4 )P( S4 ) –150
b. P( S4 | S2 ) = 5% Defective (0.3)
–$250.00
P( S2 | S4 )P( S4 ) + P( S2 | S3 )P( S3 )
EMV(node 1) (0.7) (87) (0.2)(187)
0.7 0.5
0.78 (0.1)(250)
0.7 0.5 0.2 0.5
$127
Therefore, P(S3 S2) 0.22
6634 CH08 UG 8/23/02 2:20 PM Page 67
1 Favorable Market
Produce $95,000
4
Survey Razor Unfavorable Market
–$65,000
Unfavorable Do Not Produce Razor
ey
–$5,000
urv
tS
Favorable Market
uc
Produce $80,000
nd
5
Co
Favorable Market
Produce $100,000
7
Razor Unfavorable Market
–$60,000
Do Not Produce Razor
$0
Figure for Problem 8-28a
c. See file P8-28.XLS for the TreePlan solution of this problem. appropriate probabilities times the economic consequences for a
The calculations are as follows: small, medium, or a large facility. That alternative that maximizes
the expected monetary value will be chosen. The results follow.
EMV (node 3) (95,000)(0.78)
(65,000)(0.22) $59,800 No survey (analysis values in hundreds of thousands of dollars):
EMV (node 4) (95,000)(0.27) FACILITY
(65,000)(0.73) Probability Demand Small Medium Large
$21,800 0.15 Low 500 200 200
EMV (node 5) (80,000)(0.89) 0.4 Medium 500 700 400
0.45 High 500 800 1,000
(80,000)(0.11)
EMV 500 670 580
$62,400
EMV (node 6) (80,000)(0.18) As seen from the analysis above, the expected monetary val-
(80,000)(0.82) ues for the small, medium, and large facilities are $500,000,
$670,000, and $580,000. The medium facility, with an expected
$51,200
monetary value of $670,000, is selected because it represents the
EMV (node 7) (100,000)(0.5) highest expected monetary value.
(60,000)(0.5) We are still not done with solving the problem. We also have
$20,000 to look at the situation of performing the survey. The most difficult
part of this problem is the computation of the revised probabilities
EMV (conduct survey) (59,800)(0.45) using Bayes’ law. For each alternative facility, three revised proba-
(5,000)(0.55) bilities must be computed, representing low, medium, and high
$24,160 demand for a facility. These probabilities can be computed using
tables. One table is used to compute the probabilities for low sur-
EMV (conduct pilot survey) (62,400)(0.45)
vey results, another table is used for medium survey results, and a
(20,000)(0.55) final table is used for high survey results. These tables are shown
$17,080 below.
EMV (neither test) 20,000
For low survey results—A1:
Therefore, the best decision is to conduct the survey and follow
the outcome. State of
Nature P(Bi) P(Ai Bj) P(Bj and Ai) P(Bj Ai)
8-29. Bob has two major decisions to make. First, he must decide
B1 0.150 0.700 0.105 0.339
whether or not to conduct the survey. After this decision, he must de-
B2 0.400 0.400 0.160 0.516
cide whether to develop a small, medium, or large waste disposal fa-
B3 0.450 0.100 0.045 0.145
cility. Of course, Bob always has the option of not building any facil-
ity, with an expected monetary value of 0. To solve this problem, we P(A1) 0.310
will look at a decision tree in the figure for Problem 8-29 (shown on For medium survey results—A2:
the next page) involving no survey and then another decision tree in-
State of
volving the use of a survey. The decision branches that represent the
Nature P(Bi) P(Ai Bj) P(Bj and Ai) P(Bj Ai)
highest expected monetary value will be the chosen plan of action.
If no survey is to be conducted, the decision tree is fairly B1 0.150 0.200 0.030 0.082
straightforward. There are three main decisions, which are building B2 0.400 0.500 0.200 0.548
a small, medium, or large facility. Extending from these decision B3 0.450 0.300 0.135 0.370
branches are three possible demands, representing the possible P(A2) 0.365
states of nature. The demand for this type of facility could be either For high survey results—A3:
low, medium, or high. It was given in the problem that the proba- State of
bility for a low demand is 0.15. The probabilities for a medium and Nature P(Bi) P(Ai Bj) P(Bj and Ai) P(Bj Ai)
a high demand are 0.40 and 0.45, respectively. The problem also
B1 0.150 0.100 0.015 0.046
gave monetary consequences for building a small, medium, or
B2 0.400 0.100 0.040 0.123
large facility when the demand could be low, medium, or high for B3 0.450 0.600 0.270 0.831
the facility. These data are reflected in a decision tree on the next
page. Using the data in the decision tree, we can multiply the P(A3) 0.325
6634 CH08 UG 8/23/02 2:20 PM Page 69
Decision Tree—Survey
high survey results are 0.365 and 0.325, respectively. These prob-
L abilities can then be used along with the conditional probabilities
450,000
in selecting the best decision. This can be done by determining the
Small M 450,000 expected monetary value for the small, medium, and large facility
when the survey results are low, medium, and high.
H 450,000
Decision Tree—No survey
L 150,000 (0.15) $500,000
Medium M 650,000 (0.40) $500,000
H 750,000 00 (0.45)
0,0 $500,000
L $50
–250,000 all (0.15) $200,000
Sm
Large M 350,000
)
$700,000
0
H
ey (0
Low $495,00
950,000 La (0.45)
rge $800,000
L $5
80
surv
Large M 350,000
0.339 Low 450,000 150,000 250,000
$821 y (0.325
surv
If the survey results are low, the best decision is to build the 8-30. EU(node 3) (0.95)(0.78) (0.5)(0.22) 0.85
medium facility with an expected return of $495,000. If the survey EU(node 4) (0.95)(0.27) (0.5)(0.73) 0.62
results are medium, the best decision is also to build the medium
EU(node 5) (0.9)(0.89) (0)(0.11) 0.80
plant with an expected return of $646,000. On the other hand, if the
survey results are high, the best decision is to build the large facility EU(node 6) (0.9)(0.18) (0)(0.82) 0.16
with an expected monetary value of $821,000. Now, we can take EU(node 7) (1)(0.5) (0.55)(0.5) 0.78
these results and multiply them times the probability of having low EU(conduct survey) (0.85)(0.45)
survey results, medium survey results, and high survey results to get
the expected value of taking the survey and selecting the appropriate (0.8)(0.55) 0.823
decision. The results of these computations are shown below. EU(conduct pilot study) (0.80)(0.45)
(0.7)(0.55) 0.745
Final analysis:
EU(neither test) 0.81
Probability Demand
Thus, the best decision is to conduct a survey and follow its out-
0.31 Low 495,000
come. Jim is a risk avoider. (See figure for Problem 8-30.).
0.365 Medium 646,000
0.325 High 821,000 8-31.
EU(node 2) (0.82)(0.99) (0.18)(0) 0.8118
EMV $656,065
EU(node 3) (0.11)(0.99) (0.89)(0) 0.1089
As you can see from the analysis, the expected monetary value is
approximately $656,000. This is the expected monetary value for EU(node 4) (0.5)(1) (0.5)(0.1) 0.55
conducting the survey and taking the appropriate action. Because EU(conduct survey) (0.55)(0.8118) (0.45)(0.7)
the expected monetary value for not conducting the survey is 0.76149
greater, the decision is not to conduct the survey and to build the
medium-sized facility. The expected value from doing this, shown EU (do not conduct survey) 0.9
in an earlier table, is $670,000. The solution of this problem using Therefore, the medical professionals should not conduct the sur-
TreePlan is shown in file P8-29.XLS. vey and should not construct the clinic. They are risk avoiders.
(See figure for Problem 8-31 on the next page).
Utility
0.85 Market Favorable (0.78)
Produce 0.95
3 Market Unfavorable (0.22)
Survey Razor 0.5
Favorable Do Not Produce Razor
0.82 (0.45) 0.8
(0.55) 0.8
Su
uct
Produce
Co
(0.55) 0.7
er
Te
st
Payoff Utility
U = 0.8118 Favorable Market (0.82)
Construct $95,000 0.99
2 Unfavorable Market (0.18)
Survey Clinic –$45,000 0
Favorable Do Not Construct Clinic
U = 0.76 (0.55) –$5,000 0.7
t
uc 1 U = 0.1089 Favorable Market (0.11)
o nd ket Construct $95,000 0.99
C ar ey 3
M rv Unfavorable Market (0.89)
Survey Clinic
Su –$45,000 0
Unfavorable Do Not Construct Clinic
D
$100,000 1.0
on
Construct
du
4
ct
Perfect Information
Poor Market Average Good Excellent
4. There are a number of options that Bob did not consider. See Table A
if you can list one or more of these options. State of Probability of
Nature Occurrence
SOLUTION TO THE BLAKE ELECTRONICS CASE S1 (fav.) 0.6
S2 (unfav.) 0.4
1. By employing basic decision theory, Steve’s problem is
solved quite easily. He needs no additional information for its so-
The values in Table A were given by Blake Electronics’ own
lution. In fact, Iverstine and Kinard’s figures are more suitable for
research staff. Given that the product line is introduced, it has a
manipulation than are MAIs.
60% chance of success and a 40% chance of failure.
2. Steve’s problem involves three decisions. First, should he MAI predicted favorable outcomes 50 out of 100 (50%)
contract the services of an outside research agency? Second, times (35 15 50). Given that the actual outcome was success-
should he employ MAI or Iverstine and Kinard, if a survey is war- ful, MAI predicted that outcome 35 times out of 50 (70%), which
ranted? Third, in any case, should the new product line be intro- means that MAI was wrong 30% of the time (100% 70%) it
duced? predicted a favorable outcome. Similarly, 30 out of 50 times
By using the probabilities stated in the case, some expected (60%) MAI correctly predicted an unfavorable outcome. It follows
values can be derived. Then these expected values can be com- that 40% of the time, the firm was incorrect in predicting an unfa-
pared and a decision can be made. This is the basis of decision vorable outcome. See Table B.
theory that will be used to reach a conclusion.
To facilitate the solving of this problem, several variables Table B
will be defined here. MAIs Conditional Probabilities P(Si Ik)
Si states of nature STATE OF NATURE
where i 1 connotes a favorable outcome from the introduc- Survey Predictions S1 S2
tion of the product line, and i 2 connotes an unfavor- I1 0.70 0.40
able outcome. I2 0.30 0.60
Aj decisions
It was given in the case that 90% of the time I&K made a cor-
where j 1 means survey will be done
rect favorable prediction; and 80% of the time the firm made a
j 2 means no survey will be undertaken correct unfavorable prediction. The other two probabilities follow
j 3 means MAI will be employed logically. See Table C.
j 4 means Iverstine and Kinard (I&K) will be
Table C
employed
I&K Conditional Probabilities P(Ik Si)
j 5 means product will be introduced
STATE OF NATURE
j 6 means product will not be introduced
Survey Predictions S1 S2
Ik survey predictions
I3 0.90 0.20
where k 1 means MAI predicts a favorable outcome I4 0.10 0.80
k 2 means MAI predicts an unfavorable outcome
k 3 means I&K predicts a favorable outcome For simplicity, the entire problem is drawn in decision tree
form. Using the decision tree, expected values will be found and
k 4 means I&K predicts an unfavorable outcome compared working from right to left.
P(Ik Si) conditional probability; probability of Ik given Si First, assuming that no survey is done (A2), the expected
P(Si Ik) probability of Si given Ik value of introducing the product line (expected return) can be de-
The following tables give the probabilities of a pertinent termined. The case says that sales can be increased by $2 million.
nature. However, the cost of developing the product ($500,000) must be
6634 CH08 UG 8/23/02 2:20 PM Page 74
subtracted from that figure to arrive at a figure for total benefit for The problem, however, is still not solved. Two decisions re-
a favorable outcome. That figure is $1,500,000. If the product is main: (1) Will a survey help? If so, (2) Who should do the survey?
introduced and an unfavorable outcome materializes, the cost of An evaluation of expected returns is necessary here, too. With the
developing the product becomes a loss ($500,000). Table D surveys, the decision to not introduce the product line still has an
computes the expected return for introducing the product and for expected return of 0 [E(A6) 0]. (See the decision tree.) An eval-
not introducing it. uation of expected returns is necessary and requires Bayes’ law.
P( Ik | Si ) P( Si )
Table D P( Si | Ik )
P( Ik )
Payoff Table (Profit)
Prior State of Don’t where P(Ik) P(Ik S1)P(S1) P(Ik S2)P(S2).
Probabilities Nature Introduce Introduce The additional probabilities needed are computed below:
0.6 S1 $1,500,000 0 P(S1 I1) .7, given in problem
0.4 S2 500,000 0 P(S2 I1) .3, given in problem
EXPECTED P(S1 I2) .4, given in problem
PROFIT $ 700,000 0
P(S2 I2) .6, given in problem
I2 (0.5) mil
00
$0.3 mil
,0
A6
$1
(–
$596,400
S1 ($1.5 million)
$1.24
(–
A5
$3
mil
00
A1 A6
*
$0.7688
mil S1 ($1.5 million)
A5 –$0.18
I4 (0.38) mil
$0
S2 (–$0.5 million)
$700,000 A6
0.6($1.5 mil)
S1
$700,000
A2
A5 S2
0.4(–$0.5 mil)
decisions to be made
$700,000 probabilities encountered
A6 decision not chosen
* cost of survey
6634 CH08 UG 8/23/02 2:20 PM Page 75
E—Equipment costs
I—Introduction to market costs
Market size and Revenues:
Without With
Competition Competition
S—Substantial (P .1) $800,000 $400,000
M—Moderate (P .6) $600,000 $300,000
L—Low (P .3) $500,000 $250,000
Competition:
C6—Competition at end of 6 months (P .5)
No C6—No competition at end of 6 months (P .5)
C8—Competition at end of 8 months (P .6)
No C8—No competition at end of 8 months (P .4)
C12—Competition at end of 12 months (P .8)
No C12—No competition at end of 12 months (P .2)
Mkt S R E I
S (.1)
400 – 100 – 100 – 150 = 50
C12 (.8) M (.6)
300 – 100 – 100 – 150 = –50
L (.3)
Ok (.9) 250 – 100 – 100 – 150 = –100
S (.1)
800 – 100 – 100 – 150 = 450
Normal No C12 (.2) M (.6)
600 – 100 – 100 – 150 = 250
L (.3)
500 – 100 – 100 – 150 = 150
No (.1) (Stop)
– 100 = –100
C8 (.6)
– 80 = –80
S (.1)
400 – 140 – 100 – 150 = 10
8 Month Ok (.9) M (.6)
300 – 140 – 100 – 150 = –90
L (.3)
No C8 (.4) 250 – 140 – 100 – 150 = –140
S (.1)
800 – 140 – 100 – 150 = 410
No (.1) M (.6)
600 – 140 – 100 – 150 = 210
6 Mo
L (.3)
500 – 140 – 100 – 150 = 110
S (.1)
nth
S (.1)
50
C12 (.8) M (.6)
–50
L (.3)
Ok (.9) –100
S (.1)
450
Normal No C12 (.2) M (.6)
250
L (.3)
150
No (.1) (Stop)
–100
C8 (.6)
–80
S (.1)
10
8 Month Ok (.9) M (.6)
–90
L (.3)
No C8 (.4) –140
S (.1)
410
No (.1) M (.6)
210
6 Mo
L (.3)
110
S (.1)
nth
60
C6 (.5) M (.6)
–40
L (.3)
–90
S (.1)
50
C12 (.8) M (.6)
–50
L (.3)
Ok (.9) –100
S (.1)
450
No C6 (.5) No C12 (.2) M (.6)
250
L (.3)
150
No (.1)
–100
Mkt
S (.1)
50
C12 (.8) M (.6)
–50
–55 L (.3)
Ok (.9) –100
(4) S (.1)
450
Normal –6.4 240 M (.6)
250
No C12 (.2) L (.3)
150
No (.1) (Stop)
–100
C8 (.6)
–80
S (.1)
10
8 Month –74.2 Ok (.9) M (.6)
(–74.2) –90
–95 L (.3)
No C8 (.4) –140
S (.1)
410
No (.1) M (.6)
210
6 Mo
200 L (.3)
110
S (.1)
nth
60
C6 (.5) M (.6)
–40
–45 L (.3)
–90
S (.1)
50
C12 (.8) M (.6)
–50
–55 L ( .3)
Ok (.9) –100
S (.1)
450
No C6 (.5) 240 M (.6)
(19.3) 250
No C12 (.2) L (.3)
150
No (.1)
–100
The optimal program is to adopt the 6-month program.
6634 CH08 UG 8/23/02 2:20 PM Page 78
Twenty-five
Years .04 25 1.00
5.95 years
Expected survival rate with surgery (5.95 years) exceeds the non-
surgical survival rate of 2.70 years. Surgery is favorable.
1. Machine 1 Machine 2
(Semiautomated) (Automated)
2. Payoff Matrix