You are in charge of downsizing your company and have to consider which of 4 opt
ID: 2774061 • Letter: Y
Question
You are in charge of downsizing your company and have to consider which of 4 options you should consider. The options differ in the amount of money saved (M) and the amount of employees terminated (E). The alternatives are
Plan
Money Saved (US$)
# Employees Terminated
A
5,000,000
50
B
2,000,000
25
C
1,000,000
10
D
0
0
a. Completely specify the multi-attribute utility function given the above information.
b. What is your optimal decision, i.e. which plan would you select?
Plan
Money Saved (US$)
# Employees Terminated
A
5,000,000
50
B
2,000,000
25
C
1,000,000
10
D
0
0
Explanation / Answer
a. Multi Strategy Utility function will Be 0.525* D + 0.475 *A
b. Case 1 - Use Option B - Terminate 25 employees and save $2,000,000. Therefore $80,000 will be saved for terminating one employee
Case 2 - Use the utility chance in which savings will be equivalent to 0.525 * 0 + 0.475 * 5,000,000 = 2,375,000 and the number of employees terminates would be 0.525 * 0 + 0.475* 50 = 23.75 employees. Therefore, $100,000 will be saved for terminating one employee.
Hence using a lottery with a 0.525 chance of choosing D and a 0.475 chance of choosing A is better. In other words case 2 is better since more savings is achieved by terminating one employee
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