Decision Tree Model

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Instructor’s Manual

Chapter 1

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Chapter 1
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Chapter Outline
A Decision Tree Model and Its Analysis • The following concepts are introduced through the use of a simple decision tree example (the Bill Sampras ' summer job decision): Decision tree Decision node Event node Mutually exclusive and collectively exhaustive set of events Branches and final values Expected Monetary Value (EMV) Optimal decision strategy • Introduction of the folding back or backward induction procedure for solving a decision tree. • Discussion on sensitivity analysis in a decision tree. Summary of the General Method of Decision Analysis. Another Decision Tree Model and Its Analysis • Detailed formulation, discussion, and solution of the
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If the forecast indicates a rainy day, she should cancel the show. If the forecast indicates a sunny day, she should continue with the show. The EMV of this strategy is $6,200.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright 2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

Instructor’s Manual

Chapter 1

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(a) See decision tree above. (b) Once Monday 's bid is made, Newtone 's optimal strategy is to accept the bid if it is a $3,000,000 bid and reject it if the bid is for $2,000,000. If Monday 's bid is rejected, then accept Tuesday 's bid, regardless of the amount offered. The EMV of this strategy is $2,600,000.

Manual to accompany Data, Models & Decisions: The Fundamentals of Management Science by Bertsimas and Freund. Copyright 2000, South-Western College Publishing. Prepared by Manuel Nunez, Chapman University.

Instructor’s Manual

Chapter 1

5

1.3
(a) As shown in the table below, as p decreases James ' optimal decision changes as to take Meditech 's offer. A break-even analysis where we solve the equation 440p - 200(1-p) = 150 reveals that the break-even probability is p=0.55. In other words, if the probability of successful 3D software is below 0.55, then it is better for James to accept Meditech 's offer, otherwise continue with the project.
Probability of Successful 3D Development p
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