Problems (Decision Making Under Risk)

(1) A physician purchases a particular vaccine on monday of each week. The vaccine must be used within the
week following, otherwise it becomes worthless. The vaccine costs Rs.2 per dose and the physician charges
Rs.4 per dose. In the past 50 weeks, the physician has administered the vaccine in the following quantities.
Dose per week : 20 25 50 60
Number of weeks : 05 15 25 05
Determine how many doses the physician should buy every week.Calculate EMV, EPPI, EVPI and EOL.
Solution: Clearly, we can state the probabilities for possible number of doses as follows
Dose per week : 20 25 50 60
Probability : 0.1 0.3 0.5 0.5
Here, the probability of a given of doses is obtained by dividing the corresponding given number of weeks by
the total number of weeks(50).
Now, we calculate the conditional profit values as follows
Cost per vaccine = Rs. 2
Doctors Charges Per vaccine = Rs. 4
Profit Per Vaccine = Rs. 2
Conditional Profit = 4R - 2B, if B > R
= 2B, if B < R
Where R = Number of vaccines Required and B = Number of vaccines bought.
(i) The resulting conditional payoffs and the corresponding expected payoffs are computed in the table below:
Since the EMV of buying 50 is the highest, the doctor should by 50 doses per week.
(ii) The EPPI and EVPI are calculated as shown below:
Clearly, EVPI = EPPI - EMV* = 81 - 58 = 23
20 25 50 60 20 25 50 60
20 0.1 40 30 -20 -40 4 3 -2 -4
25 0.3 40 50 0 -20 12 15 0 -6
50 0.5 40 50 100 80 20 25 50 40
60 0.1 40 50 100 120 4 5 10 12
EMV 40 48 58 42
Vaccines
Required
Probability
Conditional Pay Offs Expected Pay Offs
(Vaccines bought Per Week) (Vaccines bought Per Week)
20 25 50 60
20 0.1 40 30 -20 -40
25 0.3 40 50 0 -20
50 0.5 40 50 100 80
60 0.1 40 50 100 120
50 X 0.3 = 15
40 X 0.1 = 4
Maximum
Payoff
Expected Payoff
81
120 X 0.1 = 12
100 X 0.5 = 50
EPPI