ASSIGNMENT - DECISION ANALYSIS
1. Morley Properties is planning to build a condominium development on St. Simons Island, Georgia. The company is trying to decide between building a small, medium, or large development. The payoffs received for each size of development will depend on the market demand for condominiums in the area, which could be low, medium, or high. The payoff matrix for this decision problem is: (Problem 9 in the textbook)
|
Market Demand
|
|
Size of Development
|
Low
|
Medium
|
High
|
|
Small
|
400
|
400
|
400
|
|
Medium
|
200
|
500
|
500
|
|
Large
|
- 400
|
300
|
800
|
(Payoffs in $1000s)
The owner of the company estimates a 21.75% chance that market demand will be low, a 35.5% chance that it will be medium, and a 42.75% chance that it will be high.
a. What decision should be made according to the maximax decision rule?
b. What decision should be made according to the maximin decision rule?
c. What decision should be made according to the minimax regret decision rule?
d. What decision should be made according to the EMV decision rule?
e. What decision should be made according to the EOL decision rule?
2. Refer to the previous question (above). Morley Properties can hire a consultant to predict the most likely level of demand for this project. This consultant has done many similar studies and has provided Morley Properties with the following joint probability table summarizing the accuracy of the results: (Problem 10 in the textbook)
|
Actual Demand
|
|
Forecast Demand
|
Low
|
Medium
|
High
|
|
Low
|
0.1600
|
0.0300
|
0.0100
|
|
Medium
|
0.0350
|
0.2800
|
0.0350
|
|
High
|
0.0225
|
0.0450
|
0.3825
|
The sum of the entries on the main diagonal of this table indicates that the consultant's forecast is correct about 82.25% of the time, overall.
a. Construct the conditional probability table showing the probabilities of the various actual demands giving each of the forecasted demands.
b. What is the EMV of the optimal decision without the consultant's assistance?
c. Construct a decision tree Morley Properties would use to analyze the decision problem if the consultant is hired at a cost of $0.
d. What is the EMV of the optimal decision with the consultant's free assistance?
e. What is the maximum price Morley Properties should be willing to pay to the consultant?
Attachment:- Assignment Files.rar