Given the following payoff table with the profits ($m), a firm might expect in a foreign country for alternative factory investments (x,y and z) under different levels of inflation. States of nature- Amount of inflation payoffs as profits decision alternatives Build Factory X Build factory Y Lease Plant Z (a) (b) (c) (d) 10 (e) (f) 40 10 A= 2% 30 50 40 B=5% 50 Assume now that the pay offs are COSTS answer the following: 60 80 C=10% 120 70 10 D=15% Using an optimistic approach (maximax), which option would you choose? Using a pessimistic approach (maximin), which option would you choose? If you are a LaPlace decision maker, which option would you choose? If you are a Hurwicz decision maker, which option would you choose with a = 0.2? Using a minimax regret approach, which option would you choose? Using the same probabilities of of 0.2,0.3,0.40 and 0.10 for possible inflation levels A, B, C and D respectively, which decision alternative will minimise the expected cost? What is the expected annual cost associated with that recommendation? What is the most the firm should be willing to pay to obtain further (perfect) information (EVPI)?
Given the following payoff table with the profits ($m), a firm might expect in a foreign country for alternative factory investments (x,y and z) under different levels of inflation. States of nature- Amount of inflation payoffs as profits decision alternatives Build Factory X Build factory Y Lease Plant Z (a) (b) (c) (d) 10 (e) (f) 40 10 A= 2% 30 50 40 B=5% 50 Assume now that the pay offs are COSTS answer the following: 60 80 C=10% 120 70 10 D=15% Using an optimistic approach (maximax), which option would you choose? Using a pessimistic approach (maximin), which option would you choose? If you are a LaPlace decision maker, which option would you choose? If you are a Hurwicz decision maker, which option would you choose with a = 0.2? Using a minimax regret approach, which option would you choose? Using the same probabilities of of 0.2,0.3,0.40 and 0.10 for possible inflation levels A, B, C and D respectively, which decision alternative will minimise the expected cost? What is the expected annual cost associated with that recommendation? What is the most the firm should be willing to pay to obtain further (perfect) information (EVPI)?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
Related questions
Question
Transcribed Image Text:Given the following payoff table with the profits ($m), a firm might expect in a foreign country
for alternative factory investments (x,y and z) under different levels of inflation.
States of nature- Amount of inflation
payoffs as profits
decision
alternatives
Build Factory X
Build factory Y
Lease Plant Z
(d)
(e)
(f)
10
h)
40
10
A= 2%
30
50
40
B=5%
50
60
80
C=10%
120
70
10
Assume now that the pay offs are COSTS answer the following:
Using an optimistic approach (maximax), which option would you choose?
Using a pessimistic approach (maximin), which option would you choose?
If you are a LaPlace decision maker, which option would you choose?
If you are a Hurwicz decision maker, which option would you choose with a = 0.2?
D=15%
Using a minimax regret approach, which option would you choose?
Using the same probabilities of of 0.2,0.3,0.40 and 0.10 for possible inflation levels A,
B, C and D respectively, which decision alternative will minimise the expected cost?
What is the expected annual cost associated with that recommendation?
What is the most the firm should be willing to pay to obtain further (perfect)
information (EVPI)?
Use the alternative method to verify EVPI
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Recommended textbooks for you
Practical Management Science
Operations Management
ISBN:
9781337406659
Author:
WINSTON, Wayne L.
Publisher:
Cengage,
Operations Management
Operations Management
ISBN:
9781259667473
Author:
William J Stevenson
Publisher:
McGraw-Hill Education
Operations and Supply Chain Management (Mcgraw-hi…
Operations Management
ISBN:
9781259666100
Author:
F. Robert Jacobs, Richard B Chase
Publisher:
McGraw-Hill Education
Practical Management Science
Operations Management
ISBN:
9781337406659
Author:
WINSTON, Wayne L.
Publisher:
Cengage,
Operations Management
Operations Management
ISBN:
9781259667473
Author:
William J Stevenson
Publisher:
McGraw-Hill Education
Operations and Supply Chain Management (Mcgraw-hi…
Operations Management
ISBN:
9781259666100
Author:
F. Robert Jacobs, Richard B Chase
Publisher:
McGraw-Hill Education
Purchasing and Supply Chain Management
Operations Management
ISBN:
9781285869681
Author:
Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson
Publisher:
Cengage Learning
Production and Operations Analysis, Seventh Editi…
Operations Management
ISBN:
9781478623069
Author:
Steven Nahmias, Tava Lennon Olsen
Publisher:
Waveland Press, Inc.