a.
Construct the decision tree.
a.
Explanation of Solution
Here, there are two decision alternatives d1 and d2 and the three states of nature s1, s2 and s3.
Thus, the decision tree is given as follows:
Thus, the decision tree has been constructed.
b.
Find the decision using the optimistic, conservative and minimax regret approaches.
b.
Answer to Problem 1P
The decision d1 gives the optimistic approach because it has the largest maximum profit.
The decision d2 gives the conservative approach because it has the largest minimum profit.
The minimax regret is the decision d1 because it minimizes the maximum regret.
Explanation of Solution
By using the decision tree in Part (a), the maximum and minimum profit based on the decisions d1 and d2.
Decision | Maximum Profit | Minimum Profit |
d1 | 250 | 25 |
d2 | 100 | 75 |
Optimistic approach:
The optimistic approach evaluates each decision alternative in terms of best payoff that can occur.
The decision d1 gives the optimistic approach because it has the largest maximum profit (from the above table).
Conservative approach:
The conservative approach evaluates each decision alternative in terms of worst payoff that can occur.
The decision d2 gives the conservative approach because it has the largest minimum profit (from the above table).
Minimax Regret approach:
The minimax regret approach is the difference between the payoff associated with a particular alternative and payoff associated with the most decision that would yield the most desirable payoff for a given state of nature.
Regret or opportunity loss table:
Decision | s1 | s2 | s3 |
d1 | 0 | 0 | 50 |
d2 | 150 | 0 | 0 |
The maximum regret for the decision d1 is 50 and d2 is 150.
Here, the decision d1 has been selected because it minimizes the maximum regret.
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Chapter 12 Solutions
Essentials Of Business Analytics
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