BM2102

PROBLEM-SOLVING FOR DECISION ANALYSIS

NAME: SECTION: DATE: SCORE:

BENJAMIN, APRIL JOY BSA 4 12/2/22

Quiz
T. Bone Puckett, a corporate raider, has acquired a textile company and is contemplating the future of one of its major
plants, located in South Carolina. Three alternative decisions are being considered:
(1) expand the plant and produce lightweight, durable materials for possible sales to the military, a market with little
foreign competition; (2) maintain the status quo at the plant, continuing production of textile goods that are subject to
heavy foreign competition; or (3) sell the plant now. If one of the first two (2) alternatives is chosen, the plant will still
be sold at the end of a year. The amount of profit that could be earned by selling the plant in a year depends on foreign
market conditions, including the status of a trade embargo bill in Congress. The following payoff table describes this
decision situation:

State of Nature
Good Foreign Competitive Poor Foreign Competitive
Decision
Conditions Conditions
Expand 800,000 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000

A. Determine the best decision by using the following decision criteria:

a. Maximax
Maintain status quo 1,300,000

b. Maximin

Expand 500,000

c. Minimax regret

Good Foreign Competitive Conditions Poor Foreign Competitive Conditions

1,300,000-800,000=500,000 500,000-500,000=0
1,300,000- 1,300,000=0 500,000- (-150,000) =650,000
1,300,000-320,000=980,000 500,000-320,000=180,000

Good Foreign Competitive Poor Foreign Competitive

Decision
Conditions Conditions
Expand 500,000 0
Maintain status quo 0 650,000
Sell now 980,000 180,000

d. Hurwicz (𝑎 = 0.3)

Decision
VALUES
Expand 800,000(0.3)+500,000(0.7) =590,000
Maintain status quo 1,300,000(0.3) -150,000(0.7) =285,000
Sell now 320,000(0.3)+ 320,000(0.7) =320,000
 e. Equal likelihood

Decision
VALUES
Expand 800,000(0.5)+500,000(0.5) =650,000
Maintain status quo 1,300,000(0.5) -150,000(0.5) =575,000
Sell now 320,000(0.5)+ 320,000(0.5) =320,000

B. Assume that it is now possible to estimate a probability of 0.70 that good foreign competitive conditions will
exist and a probability of 0.30 that poor conditions will exist. Determine the best decision by using expected
value and expected opportunity loss.
State of Nature
Decision Good Foreign Competitive Poor Foreign Competitive
Conditions Conditions
0.70 0.30
Expand 800,000 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000

EV(Expand) 800,000(0.70) + 500,000(0.30) = 710,000

EV (Maintain status quo) 1,300,000(0.70) - 150,000(0.30) = 865,000
EV (Sell now) 320,000(0.70) + 320,000(0.30) = 320,000
 The best decision is the one with the greatest expected value. Because the greatest expected value is Php
865,000, the decision is to maintain status qou.

C. Compute the expected value of perfect information.

State of Nature
Decision Good Foreign Competitive Poor Foreign Competitive
Conditions Conditions
0.70 0.30
Expand 800,000 500,000
Maintain status quo 1,300,000 -150,000
Sell now 320,000 320,000

1,300,000(0.70) + 500,000(0.30) = 925,000

EV (Maintain status quo) 1,300,000(0.70) - 150,000(0.30) = 865,000
EVPI 925,000 - 865,000 = 60,000

D. Develop a decision tree with expected values at the probability nodes.

EV(Expand) 800,000(0.70) + 500,000(0.30) = 710,000

EV (Maintain status quo) 1,300,000(0.70) - 150,000(0.30) = 865,000
EV (Sell now) 320,000(0.70) + 320,000(0.30) = 320,000
 Good Foreign Competitive
Conditions (0.70)
800,000

710,000

500,000
2 Poor Foreign Competitive
Conditions (0.30)

Good Foreign Competitive

Conditions (0.70)
1,300,000
Expand 865,000

1
Maintain status quo
3 Poor Foreign Competitive
Conditions (0.30)
-150,000

Sell now
320,000 Good Foreign Competitive
Conditions (0.70)
320,000
4
Poor Foreign Competitive
Conditions (0.30)

320,000

08 Problem Solving 1 *Property of STI

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