Related questions with answers

Compute the expected monetary value (EMV) for purchasing $6000$ , $8000$ , $10000$ , and $12000$ loaves

If your company makes a particular decision in the face of uncertainty, you estimate that it will either gain $\$ 10,000$ , gain $\$ 1000$ , or lose $\$ 5000$ , with probabilities $0.40,0.30$ , and 0.30 , respectively. You (correctly) calculate the EMV as $\$ 2800$ . However, you distrust the use of this EMV for decision-making purposes. After all, you reason that you will never receive $\$ 2800$ ; you will receive $\$ 10,000$ , $\$ 1000$ , or lose $\$ 5000$ . Discuss this reasoning.

A home appliance company is interested in marketing an innovative new product. The company must decide whether to manufacture this product in house or employ a subcontractor to manufacture it. The file P06_56.xlsx contains the estimated probability distribution of the cost of manufacturing one unit of this new product (in dollars) if the home appliance company produces the product in house. This file also contains the estimated probability distribution of the cost of purchasing one unit of the product if from the subcontractor. There is also uncertainty about demand for the product in the coming year, as shown in the same file. The company plans to meet all demand, but there is a capacity issue. The subcontractor has unlimited capacity, but the home appliance company has capacity for only 5000 units per year. If it decides to make the product in house and demand is greater than capacity, it will have to purchase the excess demand from an external source at a premium: $225 per unit. Assuming that the company wants to minimize the expected cost of meeting demand in the coming year, should it make the new product in house or buy it from the subcontractor? Do you need a decision tree, or can you perform the required EMV calculations without one? (You can assume that neither the company nor the subcontractor will ever produce more than demand.)

Question

The most that a person should pay for perfect information is:

a) the EVPI.

b) the maximum EMV minus the minimum EMV.

c) the minimum EMV.

d) the maximum EMV.

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management

Jeffrey Helm owns a health and fitness center called Bulk-Up in Harrisburg. He is considering adding more floor space to meet increasing demand. He will either add no floor space $(\mathrm{N})$ , a moderate area of floor space $(\mathrm{M})$ , a large area of floor space (L), or an area of floor space that doubles the size of the facility (D). Demand will either stay fixed, increase slightly, or increase greatly. The following are the changes in Bulk-Up's annual profits under each combination of expansion level and demand change level:

	EXPANSION LEVEL
DEMAND CHANGE	N	M	L	D
Fixed	$\$0$	$-\$4,000$	$-\$10,000$	$-\$50,000$
Slight increase	$\$2,000$	$\$8,000$	$\$6,000$	$\$4,000$
Major increase	$\$3,000$	$\$9,000$	$\$20,000$	$\$40,000$

Jeffrey is risk averse and wishes to use the maximin criterion.

What should he do?

management

	EXPANSION LEVEL
DEMAND CHANGE	N	M	L	D
Fixed	$\$0$	$-\$4,000$	$-\$10,000$	$-\$50,000$
Slight increase	$\$2,000$	$\$8,000$	$\$6,000$	$\$4,000$
Major increase	$\$3,000$	$\$9,000$	$\$20,000$	$\$40,000$

Jeffrey is risk averse and wishes to use the maximin criterion.

What are his decision alternatives and what are the states of nature?

	STATE OF NATURE
Alternative	S1	S2
A1	$\$15,000$	$\$20,000$
A2	$\$10,000$	$\$30,000$
Probability	$0.30$	$0.70$

management

Andrew Thomas, a sandwich vendor at Hard Rock Cafe's annual Rockfest, created a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd):

	STATES OF NATURE (DEMAND)
ALTERNATIVES	BIG	AVERAGE	SMALL
Large stock	$\$22,000$	$\$12,000$	$-\$2,000$
Average stock	$\$14,000$	$\$10,000$	$\$6,000$
Small stock	$\$9,000$	$\$8,000$	$\$4,000$

The probabilities associated with the states of nature are $0.3$ for a big demand, $0.5$ for an average demand, and $0.2$ for a small demand.

Compute the expected value of perfect information (EVPI).

management

Andrew Thomas, a sandwich vendor at Hard Rock Cafe's annual Rockfest, created a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd):

	STATES OF NATURE (DEMAND)
ALTERNATIVES	BIG	AVERAGE	SMALL
Large stock	$\$22,000$	$\$12,000$	$-\$2,000$
Average stock	$\$14,000$	$\$10,000$	$\$6,000$
Small stock	$\$9,000$	$\$8,000$	$\$4,000$

The probabilities associated with the states of nature are $0.3$ for a big demand, $0.5$ for an average demand, and $0.2$ for a small demand.

Determine the alternative that provides Andrew the greatest expected monetary value (EMV).

management

Even though independent gasoline stations have been having a difficult time, Ian Langella has been thinking about starting his own independent gasoline station. Ian's problem is to decide how large his station should be. The annual returns will depend on both the size of his station and a number of marketing factors related to the oil industry and demand for gasoline. After a careful analysis, Ian developed the following table:

SIZE OF FIRST STATION	GOOD MARKET (S)	FAIR MARKET (S)	POOR MARKET (S)
Small	$50,000$	$20,000$	$-10,000$
Medium	$80,000$	$\$30,000$	$-20,000$
Large	$100,000$	$30,000$	$-40,000$
Very large	$300,000$	$25,000$	$-160,000$

For example, if Ian constructs a small station and the market is good, he will realize a profit of $\$ 50,000$ .

Develop a decision tree. Assume each outcome is equally likely, then find the highest EMV.

management

SIZE OF FIRST STATION	GOOD MARKET (S)	FAIR MARKET (S)	POOR MARKET (S)
Small	$50,000$	$20,000$	$-10,000$
Medium	$80,000$	$\$30,000$	$-20,000$
Large	$100,000$	$30,000$	$-40,000$
Very large	$300,000$	$25,000$	$-160,000$

For example, if Ian constructs a small station and the market is good, he will realize a profit of $\$ 50,000$ .

What is the equally likely decision?

management

SIZE OF FIRST STATION	GOOD MARKET (S)	FAIR MARKET (S)	POOR MARKET (S)
Small	$50,000$	$20,000$	$-10,000$
Medium	$80,000$	$\$30,000$	$-20,000$
Large	$100,000$	$30,000$	$-40,000$
Very large	$300,000$	$25,000$	$-160,000$

For example, if Ian constructs a small station and the market is good, he will realize a profit of $\$ 50,000$ .

What is the maximin decision?

1/4

management

	EXPANSION LEVEL
DEMAND CHANGE	N	M	L	D
Fixed	$\$0$	$-\$4,000$	$-\$10,000$	$-\$50,000$
Slight increase	$\$2,000$	$\$8,000$	$\$6,000$	$\$4,000$
Major increase	$\$3,000$	$\$9,000$	$\$20,000$	$\$40,000$

Jeffrey is risk averse and wishes to use the maximin criterion.

What should he do?

management

	EXPANSION LEVEL
DEMAND CHANGE	N	M	L	D
Fixed	$\$0$	$-\$4,000$	$-\$10,000$	$-\$50,000$
Slight increase	$\$2,000$	$\$8,000$	$\$6,000$	$\$4,000$
Major increase	$\$3,000$	$\$9,000$	$\$20,000$	$\$40,000$

Jeffrey is risk averse and wishes to use the maximin criterion.

What are his decision alternatives and what are the states of nature?

	STATE OF NATURE
Alternative	S1	S2
A1	$\$15,000$	$\$20,000$
A2	$\$10,000$	$\$30,000$
Probability	$0.30$	$0.70$

management

Andrew Thomas, a sandwich vendor at Hard Rock Cafe's annual Rockfest, created a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd):

	STATES OF NATURE (DEMAND)
ALTERNATIVES	BIG	AVERAGE	SMALL
Large stock	$\$22,000$	$\$12,000$	$-\$2,000$
Average stock	$\$14,000$	$\$10,000$	$\$6,000$
Small stock	$\$9,000$	$\$8,000$	$\$4,000$

The probabilities associated with the states of nature are $0.3$ for a big demand, $0.5$ for an average demand, and $0.2$ for a small demand.

Compute the expected value of perfect information (EVPI).

management

Andrew Thomas, a sandwich vendor at Hard Rock Cafe's annual Rockfest, created a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd):

	STATES OF NATURE (DEMAND)
ALTERNATIVES	BIG	AVERAGE	SMALL
Large stock	$\$22,000$	$\$12,000$	$-\$2,000$
Average stock	$\$14,000$	$\$10,000$	$\$6,000$
Small stock	$\$9,000$	$\$8,000$	$\$4,000$

The probabilities associated with the states of nature are $0.3$ for a big demand, $0.5$ for an average demand, and $0.2$ for a small demand.

Determine the alternative that provides Andrew the greatest expected monetary value (EMV).

management

SIZE OF FIRST STATION	GOOD MARKET (S)	FAIR MARKET (S)	POOR MARKET (S)
Small	$50,000$	$20,000$	$-10,000$
Medium	$80,000$	$\$30,000$	$-20,000$
Large	$100,000$	$30,000$	$-40,000$
Very large	$300,000$	$25,000$	$-160,000$

For example, if Ian constructs a small station and the market is good, he will realize a profit of $\$ 50,000$ .

Develop a decision tree. Assume each outcome is equally likely, then find the highest EMV.

management

SIZE OF FIRST STATION	GOOD MARKET (S)	FAIR MARKET (S)	POOR MARKET (S)
Small	$50,000$	$20,000$	$-10,000$
Medium	$80,000$	$\$30,000$	$-20,000$
Large	$100,000$	$30,000$	$-40,000$
Very large	$300,000$	$25,000$	$-160,000$

For example, if Ian constructs a small station and the market is good, he will realize a profit of $\$ 50,000$ .

What is the equally likely decision?

management

SIZE OF FIRST STATION	GOOD MARKET (S)	FAIR MARKET (S)	POOR MARKET (S)
Small	$50,000$	$20,000$	$-10,000$
Medium	$80,000$	$\$30,000$	$-20,000$
Large	$100,000$	$30,000$	$-40,000$
Very large	$300,000$	$25,000$	$-160,000$

For example, if Ian constructs a small station and the market is good, he will realize a profit of $\$ 50,000$ .

What is the maximin decision?

1/7

Related questions with answers

The most that a person should pay for perfect information is:

a) the EVPI.

b) the maximum EMV minus the minimum EMV.

c) the minimum EMV.

d) the maximum EMV.

Create an account to view solutions

Create an account to view solutions

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Related questions with answers

The most that a person should pay for perfect information is: a) the EVPI. b) the maximum EMV minus the minimum EMV. c) the minimum EMV. d) the maximum EMV.

Create an account to view solutions

Create an account to view solutions

Recommended textbook solutions

Operations Management: Sustainability and Supply Chain Management

Business Management for the IB Diploma Coursebook

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Human Resource Management

More related questions

The most that a person should pay for perfect information is:

a) the EVPI.

b) the maximum EMV minus the minimum EMV.

c) the minimum EMV.

d) the maximum EMV.