Assume that the probability of brisk business level is 0.3, the probability of m

Question

Assume that the probability of brisk business level is 0.3, the probability of medium business level is 0.3, and the probability of slow business level is 0.4.

(a) Calculate the expected value of each decision alternative. What is your recommendation using the expected value criterion?

(b) Calculate the expected opportunity loss value of each decision alternative. What is your recommendation using the expected opportunity loss criterion?

(c) Calculate and interpret the value of perfect information for this problem.

PLEASE TYPE THE ANSWER IF YOU CAN.

IF YOU MUST HAND WRITE THEN PLEASE MAKE IT NEAT AND ORGANIZED.

PLEASE ANSWER ALL QUESTIONS OR DON'T BOTHER AT ALL.

Business Level Medium Decision Brisk Slow Buy Rent Lease 100 60 40 40 50 20 60 50

Explanation / Answer

a) P(Brisk)=0.3, P(Medium)=0.3, P(Slow)=0.4

Expected Value of Decision Alternatives-

Buy:(0.3*100)+(0.3*40)+(0.4*20)=50

Rent:(0.3*60)+(0.3*50)+(0.4*60)=57

Lease:(0.3*40)+(0.3*55)+(0.4*50)=48.5

As per the values computed above, the decision alternative to Rent is better as it gives higher expected return

b) EOL-

Construct the Loss table

The values in the above table are regret values (Max in that state- actual state values)

Buy:(0.3*0)+(0.3*15)+(0.4*40)=20.5

Rent:(0.3*40)+(0.3*5)+(0.4*0)=13.5

Lease:(0.3*60)+(0.3*0)+(0.4*10)=22

Min EOL= Max EMV

EOL+EMV for all alternatives is constant

To optimize your profit, you would select the course of action that corresponds to the lowest EOL

c) EVPI= min EOL=13.5

With perfect information, the expected loss can be reduced by 13.5

It could also be called the price that one would be willing to pay in order to gain access to perfect information

It is 13.5 in this case

Brisk Medium Slow Buy 0 15 40 Rent 40 5 0 Lease 60 0 10

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.