Concept explainers
a)
To determine: The minimum expected cost
Introduction: Expected monetary value is an anticipated value for an investment. The excepted monetary value is computed by multiplying every possible outcome by likelihood of each outcome will occur and summing the all values. Investors use expected monetary values to select the scenario that provides a desired outcome.
b.
To draw: A decision tree.
c.
To determine: The expected value of perfect information.
Expected value of perfect information (EVPI): It is the rate that a person is willing to pay to gain access to perfect information. A common area which uses expected value of perfect information is the healthcare economy. This value tries to evaluate the expected cost of the uncertainty, which can be interpreted as the expected value of perfect information.
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OPERATIONS MANAGEMENT W/ CNCT+
- Monica Britt has enjoyed sailing small boats since she was 7 years old, when her mother started sailing with her. Today, Monica is considering the possibility of starting a company to produce small sailboats for the recreational market. Unlike other mass-produced sailboats, however, these boats will be made specifically for children between the ages of 10 and 15. The boats will be of the highest quality and extremely stable, and the sail size will be reduced to prevent problems of capsizing. Her basic decision is whether to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favourable market, Monica can expect to make R90,000 from the large facility or R60,000 from the smaller facility. If the market is unfavourable, however, Monica estimates that she would lose R30,000 with a large facility and she would lose only R20,000 with the small facility. Because of the expense involved in developing the initial moulds and acquiring the…arrow_forwardDwayne Whitten, president of Whitten Industries, is considering whether to build a manufacturing plant in north Texas. His decision is summarized in the following table: Alternatives Favorable Market Unfavorable Market Build large plant $400,000 −$300,000 Build small plant $120,000 −$15,000 Don't Build $0 $0 Market Probability 0.40 0.60 a) The correct decision tree for Dwayne is shown in Figure ____ (all payoffs are in thousands). b) To maximize the return, Dwayne's decision should be to ______ . c) For Dwayne, the expected value of perfect information (EVPI) = $___________ (enter your answer as a whole numarrow_forwardConsider the following payoff table for three product decisions (A, B, and C) and three future market conditions (payoffs = P millions) Assume that is now possible for the company to estimate a probability of 0.40 that market condition1 will exist, 0.40 for market condition 2 and a probability of 0.20 that market condition 3 will exist in the future. Determine the best decision using expected value. Determine the expected value of perfect information (EVPI)?Determine the best decision using expected opportunity loss.arrow_forward
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- A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm’s capacity. The contractor must now make a decision on capacity for next year. Estimated profits under each of the two possible states of nature are as shown in the tablebelow. Which alternative should be selected if the decision criterion is:a. Maximax?b. Maximin?c. Laplace?d. Minimax regret?NEXT YEAR’SDEMANDAlternative Low HighDo nothing $50* $60Expand 20 80Subcontract 40 70arrow_forwardPlease use the payoff table (without the given prior probabilities) to answer the following questions: (a) Which alternative should be chosen under the maximax criterion? (b) Which alternative should be chosen under the maximin criterion? (c) Which alternative should be chosen under the equally-likely criterion? (d) Which alternative should be chosen under the Hurwicz (realism) criterion for α = 0.55? (e) Develop a regret table for this decision. (f) Which alternative should be chosen under the minimax regret criterion?arrow_forwardIn the environment of increased competition, a fitness club executive is considering the purchase of additional equipment. His alternatives, outcomes, and payoffs (profits) are shown in the following table: (a). If the executive is an optimistic decision maker, which alternative will he likely choose? (b). if the executive is a pessimistic decision maker, which alternative will he likely choose? (c). Market research suggests the chance of a favorable market for fitness clubs is 76%. If the executive uses this analysis, which alternative will he likely choose? I have provided the data table for the problem.arrow_forward
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- Practical Management ScienceOperations ManagementISBN:9781337406659Author:WINSTON, Wayne L.Publisher:Cengage,