Narsee Monjee Institute of Management Studies

Decision Analysis and Modeling

MBA Core : 2015-16 Trimester II

1. Consider a problem where we have three strategies S1, S2, and S3 and the states of nature are N1, N2
and N3. The pay off for each combination are known or estimated.
N1
N2
N3 (State of nature )
Strategy
S1
15
12
18
S2
9
14
10
S3
13
4
26
Make the decisions under The maximax Maximin Hurwitz Use an value of 0.9., Laplace and
Minimax Regret criteria.
St of nature->

N1

N2

N3

Max

Laplac
e

Min

Strateg
y
S1
S2

15
9

12
14

18
10

18
14

12
9

S3

13

26
Maxima
x
Minima
x
N3

26

15
11
14.333
3

26

12

15

14

8
16
0
Maxima
x
Minima
x

8
16
10

Regret

N1
Strateg
y
S1
S2
S3

N2

0
6
2

2
0
10

hurwit
z
0.9
17.4
13.5
23.8
23.8
S3

16
8

2. You are given the following payoffs of three acts A1,A2,A3 and the states of nature S1,S2,S3:
States of nature Acts
A1
A2
A3
S1
25
-10
-125
S2
400
440
400
S3
650
740
750
Make the decisions under The maximax Maximin Hurwitz Use an value of 0.6. and Laplace criteria.
St of nature->

s1
Strateg
y
A1
A2
A3

s2
0.1
25
-10
-125

s3
0.7
400
450
400

Max
0.2
650
740
750

650
740
750
750
A3

Min

25
-10
-125
25
A1

EMV

412.5
462
417.5
462
A2

Laplac
e

358.33
393.33
341.67
393.33
A2

3. . Given the following pay off in Rs. Matrix:

State of nature

Probability
Decision
Dont expand expand 200 units Expand 400 units
High demand
0.4
2500
3500
5000
Medium demand
0.4
2500
3500
2500
Low demand
0.2
2500
1500
1000
What should be the decision if we use (i) Emv criterion,(ii) The Minimax criterion (iii) The maximin
criterion?
Probabilit
y

State of nature

Decision
Dont
expand
2500
2500
2500

expand 200
units
3500
3500
1500

EMV

2500

3100

3200

Maxi

2500

3500

5000

Min

2500

1500

1000

High demand
Medium demand
Low demand

0.4
0.4
0.2

Expand 400 units

2500
1000
320
0
500
0
250
0

Expand 400
units
Expand 400
units

Dont expand

4 . Suppose that a decision maker faced with four decision alternatives and four states of nature
develops the following profit payoff table.
Decision AlternativeState of Nature
S1
S2
S3
S4
d1
14
9
10
5
d2
11
10
8
7
d3
9
10
10
11
d4
8
10
11
13
a.
If the decision maker knows nothing about the probabilities of the states of nature, what
is the recommended decision using the optimistic, conservative, and minimax regret approaches?
b.
Which approach do you prefer? Explain. Is establishing the most appropriate approach
before analysing the problem important for the decision maker? Explain.
c.
Assume that the payoff table provides cost rather than profit payoffs. What is the
recommended decision using the optimistic, conservative, and minimax regret approaches?
Decision
Alternative

S1

d1
d2
d3
d4

14
11
9
8

Regret
Decision
Alternative
d1
d2
d3
d4

S2
9
10
10
10

S3

S4

10
8
10
11

5
7
11
13
Max

Max

Min
14
11
11
13
14

d1

S1
0
3
5
6
5

S2
1
0
0
0

S3
1
3
1
0

S4
8
6
2
0
Min

5
7
9
8
9
d3

Max
8
6
5
6
5
d3

Cost Table:

Decision Alternative
d1

S1
14

S2
9

S3
10

S4
5

d2
d3

11
9

10
10

8
10

d4

10

11

Opportunity
Table:

Min

Max
5

14

7
11

11

11

13

13

Min

11

Loss

Decision Alternative

S1

d1
d2

6
3

d3
d4

1
0

S2

S3

S4

Max

0
1

2
0

0
2

1
1

2
3

6
8

Min

3
8

5. Southland Corporations decision to produce a new line of recreational products has resulted in the
need to construct either a small plant or a large plant,. The best selection of plant size depends on how
the marketplace reacts to the new product line. To conduct an analysis, marketing management has
decided to view the possible long-run demand as either low, medium, or high. The following payoff
table shows the projected profit in millions of dollars:
Plant Size Long-Run DemandLow
Medium
High
Small
150
200
200
Large
50
200
500
a.
What is the decision to be made, and what is the chance event for Southlands problem?
b.
Construct a decision tree.
c.
Recommend a decision based on the use of the optimistic, conservative, and minimax
regret approaches.
Long-Run
Demand

Small
Large

Plant Size

Low
150
50

Mediu
m
200
200

High
200
500
Max

max
200
500
500
Large

min
150
50
150
Smal
l

Opportini
ty Loss

Table:
Plant
Size

Demand
Small
Large

Low
0
100

Mediu
m
0
0

High
300
0
Min

Max
300
100
100

6. Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job,
Ken has been able to increase his annual salary by a factor of over 100. At the present time, ken is
forced to consider purchasing some more equipment for Brown Oil because of competition. His
alternatives are shown in the following table.
EQUIPMENT
FAVORABLE MARKET ($)
UNFAVORABLE MARKET ($)
Sub 100
300,000
- 200,000
Oiler J
250,000
- 100,000
Texan
75,000
- 18,000
For example, if Ken purchases a Sub 100 and if there is a favourable market, he will suffer a loss of $
200,000. But Ken has always been a very optimistic decision maker.
(a)
What type of decision is Ken facing?
(b)
What decision criterion should he use?
(c)
What alternative is best

EQUIPMENT
Sub 100
Oiler J
Texan

FAVORABLE
MARKET ($)
3,00,000
2,50,000
75,000

UNFAVORABLE
MARKET ($)
-200,000
-100,000
-18,000

Max
300,000
250,000
75,000

Max

300,000

Min
-200,000
-100,000
-18,000
-18,000

7. Todays Electronics specializes in manufacturing modern electronic components. It also builds the
equipment that produces the components. Phyllis Weinberger, who is responsible for advising the
president of Todays Electronics on electronic manufacturing equipment, has developed the following
table concerning a proposed facility:
PROFIT ($)
STRONG MARKETFAIR MARKET
Large facility
550,000
110,000
Medium-sized facility 300,000
129,000
Small facility
200,000
100,000
No facility
0
0
(a)
Develop an opportunity loss table.
(b)
What is the minimax decision?
Alternatives
States of nature

Sr no
1

S1

2
3

S2
S3

A1
55000
0
11000
0
-

A2

300000
129000
-100000

A3
20000
0
10000
0
-32000

POOR MARKET
-310,000
-100,000
- 32,000
0
A4

0
0
0

Maximu

31000
0
55000
0
A1
31000
0

Maximum
MaxiMax
Minimum
MaxiMin

Alpha
0.5

m
300000

20000
0

-100000

-32000

550000

A4

Hurwitz
Hurwitz

12000
0
A1

Laplace
Laplace

11666
7
A1

100000

84000

120000

109666.
7

89333.
3

116667

Regret
Table
Alternative
s
A1
States of nature
0
S1
19,000
S2
310,000
S3
Max

310,000

A2

A3

A4

250,000
0
100,000

350,000
29,000
32,000
350,00
0

550,000
129,000
0
550,00
0

250,000

min
250,00
0
A2

8. Even though independent gasoline stations have been having a difficult time, Susan Solomon has
been thinking about starting her own independent gasoline station. Susans problem is to decide how
large her station should be. The annual returns will depend on both the size of her station and a
number of marketing factors related to the oil industry and demand for gasoline. After a careful
analysis. Susan developed the following table:
SIZE OF FIRST
GOOD MARKET FAIR MARKET
POOR MARKET
STATION
($)
($)
($)
Small
50,000
20,000
-10,000
Medium
80,000
30,000
-20,000
Large
1,00,000
30,000
- 40,000
Very large
300,000
25,000
-160,000
For example, if Susan constructs a small station and the market is good, she will realize a profit of
$50,000.
(a)
Develop a decision table for this decision.
(b)
What is the maximax decision?
(c)
What is the maximin decision?
(d)
What is the equality likely decision?
(e)
What is the criterion of realism decision? Use an value of 0.8.
(f)
Develop an opportunity loss table.
(g)
What is the minimax decision?
1
Alternatives
States of nature

Sr no
1

S1

A1

2
A2

50000

80000

3
A3
10000
0

4
A4

300000

2
3

Alpha
0.5

S2
S3
Maximum
MaxiMax
Minimum
MaxiMin
Hurwitz
Hurwitz
Laplace
Laplace

20000
-10000

30000
-20000

30000
-40000

25000
-160000

50000

80000

30000

-10000

-20000

-40000

300000
A4
-160000

20000

30000

-5000

Maximum
300000
-10000

A1
70000

70000

55000

55000

A4
20000

30000

-5000
A4

9. After buying a computer system, Sim Thomas must decide whether to purchase (1) a complete maintenance
(or service) policy at a cost of $ 500, which would cover all maintenance costs; (2) a partial maintenance policy
at a cost of $300, which would cover some of the costs of any maintenance; or (3) no maintenance policy. The
consequences, costs, and probabilities are given in the following table:
maintenance required
not required
No Service Agreement
$3,000
$0
Partial Service Agreement
$1,500
$300
Complete Service Agreement
$ 500
$ 500
Probabilities
0.2
0.8
(a)
What do you recommend?
(b)
If the probability of needing maintenance is 0.8 (instead of 0.2) and the probability of not needing
maintenance is 0.2, how does this change Sims decision?

No Service
Agreement
Maintance
required
Maintance not
required

$3,000

Partial
Service
Agreeme
nt

Complete
Service
Agreeme
nt

$1,500

$500

0.2
0.8

Probabiliti
es

$0

$300

$500

$600

$540

$500

$500

Partial
Service
Agreeme
nt

Complete
Service
Agreeme
nt

Probabiliti
es

$1,500

$500

0.8

$300

$500

0.2

a. He should go in for Complete Service Agreement.

No Service
Agreement
Maintance
required
Maintance not
required

$3,000
$0
$2,400

$1,260

$500

$500

b. It does not change Sims decision.

10. A multi-national company (MNC) is planning a mega-project, for which one of the three sites S1,
S2 and S3 is likely to be selected. The company may take time to decide the choice.
Natura Hotels and resorts(NHR) is planning to buy land for hotel near one or more of the sites S1,
S2 and S3. The following data has been collected.
6

Site

Price of land today

S1
S2
S3

40
60
50

(Present value
if selected by MNC
90
100
70

of price of the land)(Rs. Lakhs)

As the land prices will increase as soon as MNC takes decision, NHR has to take decision quickly.
What would be the choice of NHR under Following?
(i) Optimistic criterion
S1
(ii) Conservative criterion
S3
(iii) Hervitz alpha with alpha = 0.8. S1
Payoff Table:
S1
Selected by MNC
Not Selected by
MNC
Maximax
Maximin
H

S2

S3

50

40

20

-20
50
-20
36

-20
40
-20
28

-10
20
-10
14

10.
A toy manufacturer is considering a project of manufacturing a dancing doll with three
different movement designs. The doll will be sold at an average of Rs.10. The first movement design
using gears and levers will provide the lowest tooling and set up cost of Rs.1,00,000 and Rs.5 per
unit of variable cost. A second design with spring action will have a fixed cost of Rs.1,60,000 and
variable cost of Rs.4 per unit. Yet another design with weights and pulleys will have a fixed cost of
Rs.2,00,000 and variable cost Rs.3 per unit.
Demand
Sales
Light demand
25,000
Moderate demand
1,00,000
Heavy demand
1,50,000
i.
Construct a payoff table for the above project.
ii.
Based on the following criteria, find the best course of action:
a. Criterion of optimism
Weights & Pulleys
b. Regret criterion
Weights & Pulleys
c. Hurwicz criterion ( = .4)
Weights & Pulleys
iii.
If the following additional information becomes available, then which is the optimum
design? Weights & Pulleys
Demand (units) Probability
Light demand
0.1
Moderate
demand
0.7
Heavy demand
0.2
i.
How much can the decision maker afford to pay for perfect information? 5000
ii.
Calculate the EOL. 5000
Payoff Table
Prob
Demand
0.1 Light demand
0.7 Moderate

Gears &
Spring
Weights &
Levers
Action
Pulleys
25000
-10000
-25000
400000
440000
500000

0.2

0.1
0.7
0.2

demand
Heavy
demand
650000
740000
850000
Maximax
650000
740000
850000
Hurwicz
275000
290000
325000
EMV Criterion
412500
455000
517500
EPPI
522500
EVPI
5000
Opportunity Loss Table
Gears &
Spring
Weights &
Demand
Levers
Action
Pulleys
Light demand
0
35000
50000
Moderate
demand
100000
60000
0
Heavy
demand
200000
110000
0
Minimax
200000
110000
50000
Expected Opp
Loss
110000
67500
5000