Question#1:30 marks (Decision making under Uncertainty) A large distributor of f

Question

Question#1:30 marks (Decision making under Uncertainty) A large distributor of food related items is considering setting up a new distribution centre. Based on its previous experience, it had the following information. Payoffq per month in $000 (thousand) Decision Alternative for Distribution Center Small Centre: S Medium Centre: M Large Centre: L Probability: MD: Medium Demand 40 90 80 0.5 HD: High LD: Low Demand 25 20 -30 0.2 Demand 40 65 150 0.3 Based on the above data, explain what your decisions would be by calculating the following criteria for profitability Maximin Minimax Regret Expected Payoff Expected Opportunity Loss and Find: Expected Value of Perfect Information ii. Maximax iv. Equal Likelihood vi. Hurwitz Criterion with 60% optimism vii. viii.

Explanation / Answer

1) Maximin: Determine worst payoff for each alternative and chose the best amongst them

Small = 25

Medium = 20

Large = -30

Hence, Small

2) Maximax: Determine best payoff for each alternative and chose the best amongst them

Small = 40

Medium =90

Large = 150

Hence, Large

3) Minimax regret: Subtract every payoff in each column from the best payoff in that column. Then identify worst regret for each alternative. The best of these worst regret is one with lowest value

Small = 110

Medium = 85

Large = 55

Lowest is of Large. Hence, Large

4) Equal likely: Average is take for each alternative and best amongst them is chosen

Small = (25+40+40)/3 = 35

Medium = (20+90+65)/3 = 58.3

Large = (-30+80+150)/3 = 66.66

Hence, Large

Low Medium Large Small 0 50 110 Medium 5 0 85 Large 55 10 0

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