Decision Analysis Scenario: You are a business owner faced with an important dec

Question

Decision Analysis Scenario:

You are a business owner faced with an important decision that could potentially be very lucrative. Keep in mind the “Six Steps in Decision Making” (textbook reference) as you set up your decision analysis.

1) Create a decision table in Excel QM. See video in Live Binder.

2) What are the potential payoff/losses for each alternative and state of nature?

3) Choose two of the five decision strategies, and solve it in Excel QM. State the best alternative for each strategy.

Optimistic

Pessimistic

Criterion of realism (Hurwicz)

Equally likely (Laplace)

Minimax regret

4) Why did you choose the two strategies? What are the results of the best alternative? What is your final decision?

Explanation / Answer

1) Considering smoothie carts business,lets go through the decision that could potentially be very lucrative.

For example,on a normal good day if the investment and all costs are about 150$,can sell about 300$ per cart.So the net income will be approximately 150$ per day.On a typical average day,can sell about 200$ for the same costs.So the income will be nearly 50$.And on a worst day can sell only about 100$and there will be a net loss of about 50$.

Now here is the decision table follows of the above profits and losses

2)The potential payoff and losses for each alternative and state of nature are given in the above answer.

3)and 4)

For the best strategy of decision analysis,i choose Optimistic and Equallu likely(Laplace) strategies.

The Optimistic (Maximax) decision is to build 3 new carts with a possibly payoff of $450 per day.

For equally likely strategy the average payoff will be cnsidered.To do this,the probability will be taken as 0.33.The Equally Likely decision is still to build 3 new carts with a possibly payoff of $148.50 per day.

0

Profit Good demanding day Average Worst day 3 new carts 450 150 -150 1 new cart 150 50 -50 0 new carts 0 0 0

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