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Multi-Stage Decision Analysis: Answer

The document discusses a decision analysis involving a research grant application for coal mining safety technology. It presents the costs of applying for the grant, probabilities of receiving the grant, and costs of researching different technologies if the grant is received. It constructs a decision tree to analyze the expected values of applying for the grant or not and of pursuing different technologies if the grant is received.

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182 views2 pages

Multi-Stage Decision Analysis: Answer

The document discusses a decision analysis involving a research grant application for coal mining safety technology. It presents the costs of applying for the grant, probabilities of receiving the grant, and costs of researching different technologies if the grant is received. It constructs a decision tree to analyze the expected values of applying for the grant or not and of pursuing different technologies if the grant is received.

Uploaded by

Khizie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Multi-Stage Decision Analysis

The Occupational Safety and Health Administration (OSHA) has recently announced it will award
an $85,000 research grant to the person or company submitting the best proposal for using wireless
communications technology to enhance safety in the coal-mining industry. Steve Hinton, the
owner of COM-TECH, a small communications research firm located just outside of Raleigh,
North Carolina, is considering whether or not to apply for this grant. Steve estimates he would
spend approximately $5,000 preparing his grant proposal and that he has about a 50-50 chance of
actually receiving the grant. If he is awarded the grant, he would then need to decide whether to
use microwave, cellular, or infrared communications technology. He has some experience in all
three areas but would need to acquire some new equipment depending on which technology is
used. The cost of the equipment needed for each technology is summarized as:

In addition to the equipment costs, Steve knows he will spend money in research and development
(R&D) to carry out the research proposal, but he does not know exactly what the R&D costs will
be. For simplicity, Steve estimates the following best case and worst-case R&D costs associated
with using each technology, and he assigns probabilities to each outcome based on his degree of
expertise in each area.

Steve needs to synthesize all the factors in this problem to decide whether or not to submit a grant
proposal to OSHA.

Answer:
This decision tree clearly shows that the first decision Steve faces is whether or not to submit a
proposal, and that submitting the proposal will cost $5,000. If a proposal is submitted, we then
encounter an event node showing a 0.5 probability of receiving the grant (and a payoff of $85,000)
and a 0.5 probability of not receiving the grant (leading to a net loss of $5,000). If the grant is
received, we then encounter a decision about which technology to pursue. Each of the three
technology options has an event node representing the best-case (lowest) and worst-case (highest)
R&D costs that might be incurred. The final (terminal) payoffs associated with each set of
decisions and outcomes are listed next to each terminal node. For example, if Steve submits a
proposal, receives the grant, employs cellular technology, and encounters low R&D costs, he will
receive a net payoff of $35,000. According to this decision tree, Steve should submit a proposal
because the expected value of this decision is $13,500, and the expected value of not submitting a
proposal is $0. The decision tree also indicates that if Steve receives the grant, he should pursue
the infrared communications technology because the expected value of this decision ($32,000) is
larger than the expected values for the other technologies.

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