Consider a situation where there is a cost that is either incurred or not. It is incurred only if the value of some random input is less than a specified cutoff value. Why might a simulation of this situation give a very different average value of the cost incurred than a deterministic model that treats the random input as fixed at its mean? What does this have to do with the “flaw of averages”?

Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659

Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659

Solutions

Chapter
Section
Chapter 10, Problem 57P
Textbook Problem
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Consider a situation where there is a cost that is either incurred or not. It is incurred only if the value of some random input is less than a specified cutoff value. Why might a simulation of this situation give a very different average value of the cost incurred than a deterministic model that treats the random input as fixed at its mean? What does this have to do with the “flaw of averages”?

Expert Solution
Summary Introduction

To explain: The reason why a simulation of this situation gives a very different average value of the cost incurred compared with a deterministic model.

Simulation modeling:

A simulation model is a computerized model that depicts or imitates a real-life situation. It is like other mathematical models except that it incorporates the concept of uncertainty in one or more number of the input variables.

Explanation of Solution

Illustration of the flaw of averages:

Formula:

The model makes an assumption that there is a random quantity, a level of effort with a mean of 200. If the level of effort is less than a cutoff of 180, a cost of 1,000 is incurred...

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