CH 08 Ism

61
SOLUTIONS TO DISCUSSION QUESTIONS

AND PROBLEMS
8-1. The purpose of this question is to make students use a per-
sonal experience to distinguish between good and bad decisions. A
good decision is based on logic and all of the available informa-
tion. A bad decision is one that is not based on logic and the avail-
able information. It is possible for an unfortunate or undesirable
outcome to occur after a good decision has been made. It is also
possible to have a favorable or desirable outcome occur after a bad
decision.
8-2. The decision-making process includes the following steps:
(1) dene the problem, (2) list the alternatives, (3) identify the
possible outcomes, (4) evaluate the consequences, and (5) select
an evaluation criterion and make the appropriate decision. The
rst four steps or procedures are common for all decision-making
problems. Step 5, however, depends on the decision-making
model used.
8-3. An alternative is a course of action over which we have
complete control. A state of nature is an event or occurrence in
which we have no control. An example of an alternative is decid-
ing whether or not to take an umbrella to school or work on a par-
ticular day. An example of a state of nature is whether or not it
will rain on a particular day.
8-4. The basic differences between decision-making models
under certainty, risk, and uncertainty depend on the amount of
chance or risk that is involved in the decision. A decision-making
model under certainty assumes that we know with complete con-
dence the future outcomes. Decision-making-under-risk models
assume that we do not know the outcomes for a particular decision
but that we do know the probability of occurrence of those out-
comes. With decision making under uncertainty, it is assumed that
we do not know the outcomes that will occur, and furthermore, we
do not know the probabilities that these outcomes will occur.
8-5. EMV is the expected monetary value. This is the expected
return that we would realize if the decision were repeated an in-
nite number of times. EVwPI is the expected value with perfect in-
formation. This is the return or value of making the same decision
an innite number of times when we have perfect or complete in-
formation. EVPI is the expected value of perfect information. This
is simply the difference between EMV and EVwPI. It is the
amount that we would be willing to pay for perfect information.
8-6. A decision tree is preferred to a decision table when a
number of sequential decisions are to be made. A sequential deci-
sion situation is one in which the outcome of one decision be-
comes an important factor in making future decisions. For exam-
ple, if a decision maker is considering the possibility of acquiring
additional information and a decision of whether or not to build a
new plant, the decision to acquire the new information is made
rst. Then, based on the results of the new information (if it is
gathered), the decision to build the plant is made. Therefore, these
decisions are sequential. One is made before the other.
8-7. A prior probability is one that exists before additional in-
formation is gathered. A posterior probability is one that can be
computed based on prior probabilities and additional information.
8-8. The purpose of Bayesian analysis is to determine posterior
probabilities based on prior probabilities and new information.
Bayesian analysis can be used in the decision-making process
whenever additional information is gathered. This information can
then be combined with prior probabilities in arriving at posterior
probabilities. Once these posterior probabilities are computed,
they can be used in the decision-making process as any other prob-
ability value.
8-9. The overall purpose of utility theory is to incorporate a de-
cision makers preference for risk in the decision-making process.
8-10. A utility function can be assessed in a number of different
ways. A common way is to use a standard gamble. With a stan-
dard gamble, the best outcome is assigned a utility of 1, and the
worst outcome is assigned a utility of 0. Then, intermediate out-
comes are selected and the decision maker is given a choice
between having the intermediate outcome for sure and a gamble
involving the best and worst outcomes. The probability that makes
the decision maker indifferent between having the intermediate
outcome for sure and a gamble involving the best and worst out-
comes is determined. This probability then becomes the utility of
the intermediate value. This process is continued until utility val-
ues for all economic consequences are determined. These utility
values are then placed on a utility curve.
8-11. When a utility curve is to be used in the decision-making
process, utility values from the utility curve replace all monetary
values at the terminal branches in a decision tree or in the body of
a decision table. Then, expected utilities are determined in the
same way as expected monetary values. The alternative with the
highest expected utility is selected as the best decision.
8
C H A P T E R
Decision Theory
6634 CH08 UG 8/23/02 2:20 PM Page 61
62 CHAPTER 8 DECI SI ON THEORY
8-12. A risk seeker is a decision maker who enjoys and seeks out
risk. A risk avoider is a decision maker who avoids risk even if
the economic payoff is higher. The utility curve for a risk seeker
increases at an increasing rate. The utility curve for a risk avoider
increases at a decreasing rate.
8-13. a. Decision making under uncertainty.
b. Maximax criterion.
c. Sub 100; $300,000
See le P8-13&14.XLS.
8-14. Maximin criterion: best alternative: Texan (see table).
$18,000. See le P8-13&14.XLS.
8-15. a. Decision making under riskmaximize expected
monetary value. See le P8-15.XLS.
b. EMV (Sub 100) 0.7 300,000 0.3
(200,000) 150,000
EMV (Oiler J) 0.7 250,000 0.3
(100,000)
145,000
EMV (Texan) 0.7 75,000 0.3
(218,000)
47,100
Optimal decision: Sub 100.
8-16. a., b.
Using minimum EOL, the best strategy is the small plant.
c. EVPI min EOL $134,000. See le P8-16.XLS
8-17. a. Decision under uncertainty.
b.
c. Best alternative: large wing.
8-18. a.
b. Best decision: large wing.
c. No.
8-19. Prot from each case sold is $(95 45) $50. Loss from
each case not sold is $45.
John should manufacture 8 cases of cheese spread. See le
P8-19.XLS for the Excel solution of this problem.
Row Row
Equipment Favorable Unfavorable Maximum Minimum
Sub 100 300,000 200,000 300,000 200,000
Oiler J 250,000 100,000 250,000 100,000
Texan 75,000 18,000 75,000 18,000
a a
maximax maximin
Favorable Unfavorable
Market Market EOL
Large plant (400,000 400,000) 0 (300,000) 180,000
0 300,000
Small plant (400,000 80,000) 0 (10,000) 134,000
320,000 10,000
Dont build (400,000 0) (0 0) 0 160,000
400,000
Probabilities 0.4 0.6
Population Population Row
Same Grows Average
Large wing 85,000 150,000 32,500
Small wing 45,000 60,000 7,500
No wing 0 0 0
Weighted
Population Population Average with
Same Grows 0.75
Large wing 85,000 150,000 91,250
Small wing 45,000 60,000 33,750
No wing 0 0 0
Demand
Manu- (Cases)
facture
(Cases) 6 7 8 9 EMV
6 300 300 300 300 300
7 255 350 350 350 340.5
8 210 305 400 400 352.5
9 165 260 355 450 317
Probabilities 0.1 0.3 0.5 0.1
6634 CH08 UG 8/23/02 2:20 PM Page 62
CHAPTER 8 DECI SI ON THEORY 63
8-20. The Excel setup and solution of the problem is given in
le P8-20.XLS.
a. Maximax decision: very large station.
b. Maximin decision: small station.
c. Equally likely decision: very large station.
d. Realism decision: very large station.
e.
f. Minimax decision: very large station.
8-21. a.
b. Back roads (minimum expected time used).
c. Expected time with perfect information:
15 1/2 25 1/3 30 1/6 = 20.83 minutes
Time saved is 24.1720.83 3.34 minutes.
Choose highest EMV; therefore, construct clinic.
Note: Slash lines // on the tree indicate branches that are dropped
from consideration.
8-22. EMV for node 1 (0.5) ($100,000) (0.5) ($40,000)
$30,000
Favorable Market (0.5)
$ 30,000 Unfavorable Market (0.5)
$100,000
$30,000
_
$40,000
$0
PAYOFF
EMV for no clinic is $0
D
o
N
o
th
in
g
C
o
n
s
t
r
u
c
t
C
lin
ic
1
Market
Size of
First Good Fair Poor Row Row Row Weight
Station Market Market Market Minimum Maximum Average Average
Small 50,000 20,000 10,000 10,000 50,000 20,000 38,000
Medium 80,000 30,000 20,000 20,000 80,000 30,000 60,000
Large 100,000 30,000 40,000 40,000 100,000 30,000 72,000
Very large 300,000 25,000 160,000 160,000 300,000 55,000 208,000
a a a a
maximin maximax equally realism
likely ( 0.80)
Market
Market Row
Size Good Fair Poor Maximum
Small 250,000 10,000 0 250,000
Medium 220,000 0 10,000 220,000
Large 200,000 0 30,000 200,000
Very large 0 5,000 150,000 150,000
minimax
Opportunity
Loss Table
a
No Mild Severe Expected
Congestion Congestion Congestion Time
Tennessee 15 30 45 25
Back roads 20 25 35 24.17
Expressway 30 30 30 30
(30 days)/ (20 days)/ (10 days)/
Probabilities
(60 days) 1/2 (60 days) 1/3 (60 days) 1/6
6634 CH08 UG 8/23/02 2:20 PM Page 63
8-23. a. Note: The Cost of the market study has been included in the payoffs.
b. EMV(node 2) (0.82)($95,000) (0.18)($45,000)
77,900 8,100 $69,800
EMV(node 3) (0.11)($95,000) (0.89)($45,000)
10,450 $40,050 $29,600
EMV(node 4) $30,000
EMV(node 1) (0.55)($69,800) (0.45)($5,000)
38,390 2,250 $36,140
EMV(no survey) (0.5)($100,000)
(0.5)($40,000) $30,000
The survey should be taken.
c. EVSI ($36,140 $5,000) $30,000 $11,140.
Thus, the physicians would pay up to $11,140 more for the
survey.
Note: Since EVSI uses the expected value of the best decision with
sample information assuming no cost to gather it, $5,000 had to be
added back to $36,140. File P8-23.XLS shows the solution of this
problem using TreePlan.
1
2
3
4
Favorable Market
Favorable Market
(0.82)
(0.11)
Unfavorable Market (0.18)
$ 69,800
$ 29,600
$ 30,000
$ 95,000
$
_
45,000

$
_
5,000
$ 95,000
$
_
45,000

$
_
5,000
_
$5,000
$ 100,000
$
_
40,000
$ 0
Indicates branch dropped from consideration
D
o

N
o
t

C
o
n
d
u
c
t

S
u
r
v
e
y

C
o
n
d
u
c
t
M
a
r
k
e
t

S
u
r
v
e
y
S
u
r
v
e
y

F
a
v
o
r
a
b
l
e

(
0
.
5
5
)
S
u
r
v
e
y

N
e
g
a
t
i
v
e

(
0
.
4
5
)
CONSTRUCT
CONSTRUCT
CONSTRUCT CLINIC
DO NOT CONSTRUCT
DO NOT CONSTRUCT
DO NOT CONSTRUCT
$69,800
$36,140
$36,140
$30,000
PAYOFF
6634 CH08 UG 8/23/02 2:20 PM Page 64
8-24. See the gure for Problem 8-24.
8-25. EMV(node 2) (0.9)(55,000) (0.1)($45,000)
49,500 4,500 $45,000
EMV(node 3) (0.9)(25,000) (0.1)(15,000)
22,500 1,500 $21,000
EMV(node 4) (0.12)(55,000) (0.88)(45,000)
6,600 39,600 $33,000
EMV(node 5) (0.12)(25,000) (0.88)(15,000)
3,000 13,200 $10,200
EMV(node 6) (0.5)(60,000) (0.5)(40,000)
30,000 20,000 $10,000
EMV(node 7) (0.5)(30,000) (0.5)(10,000)
15,000 5,000 $10,000
EMV(node 1) (0.6)(45,000) (0.4)(5,000)
27,000 2,000 $25,000
Since EMV(market survey) EMV(no survey), Jerry should con-
duct the survey.
Since EMV(large shop favorable survey) EMV(small shop
favorable survey), and EMV(no shop favorable survey), Jerry
should build a large shop if the survey is favorable. If the survey is
unfavorable, Jerry should build nothing since EMV(no shop un-
favorable survey) EMV(large shop unfavorable survey)
and EMV(small shop unfavorable survey). (See gure for
problem 8-25 on the next page).
S
m
a
ll
S
h
o
p
7
Market Favorable
No Shop
Market Favorable
Market Unfavorable
Market Unfavorable
6
Large
Shop
S
m
a
ll
S
h
o
p
3
Market Favorable
No Shop
Market Favorable
Market Unfavorable
Market Unfavorable
2
Large
Shop
S
m
a
ll
S
h
o
p
5
1
Market Favorable
No Shop
Market Favorable
Market Unfavorable
Market Unfavorable
4
Large
Shop
D
o

N
o
t

C
o
n
d
u
c
t

S
t
u
d
y
F
a
v
o
r
a
b
le

S
t
u
d
y
C
o
n
d
u
c
t

S
t
u
d
y
U
n
fa
v
o
r
a
b
le

S
t
u
d
y
Figure for Problem 8-24
6634 CH08 UG 8/23/02 2:20 PM Page 65
8-26. S
1
: favorable research
S
2
: unfavorable research
S
3
: store successful
S
4
: store unsuccessful
P(S
3
) P(S
4
) 0.5
P(S
1
S
3
) 0.8 P(S
2
S
3
) 0.2
P(S
2
S
4
) 0.7 P(S
1
S
4
) 0.3
a.
b.
Therefore, P(S
3
S
2
) 0.22
0 7 0 5
0 7 0 5 0 2 0 5
0 78
. .
. . . .
.
P S S
P S S P S
P S S P S P S S P S
( | )
( | ) ( )
( | ) ( ) ( | ) ( )
4 2
2 4 4
2 4 4 2 3 3
=
+
=

+
=
0 8 0 5
0 8 0 5 0 3 0 5
0 73
. .
. . . .
.
P S S
P S S P S
P S S P S P S S P S
( | )
( | ) ( )
( | ) ( ) ( | ) ( )
3 1
1 3 3
1 3 3 1 4 4
=
+
8-27. a.
EMV(node 1) (0.7) (87) (0.2)(187)
(0.1)(250)
$127
2
3
6
7
4
5
$45,000
$21,000
$33,000
$10,200
$10,000
$10,000
$10,000
$5,000
$45,000
$25,000
Large Shop
No Shop
Small Shop
Large Shop
No Shop
Small Shop
Large Shop
No Shop
Small Shop
F
a
v
o
r
a
b
l
e
S
u
r
v
e
y

(
0
.
6
)
U
n
f
a
v
o
r
a
b
l
e
S
u
r
v
e
y

(
0
.
4
)
M
a
r
k
e
t
S
u
r
v
e
y
N
o

S
u
r
v
e
y
Payoff
$55,000
$45,000
$5,000
$25,000
$15,000
$55,000
$45,000
$5,000
$25,000
$15,000
$60,000
$40,000
$0
$30,000
$10,000
1
Indicates
branch is
not chosen
1
1% Defective (0.7)
3% Defective (0.2)
5% Defective (0.1)
1% Defective (0.3)
3% Defective (0.4)
5% Defective (0.3)
127
150
B
u
y

f
r
o
m

A
B
u
y

f
r
o
m

B
$87.00 = (0.01 10,000) ($0.50) $37
$187.00 = (0.03 10,000) ($0.50) $37
$287.00 = (0.05 10,000) ($0.50) $37
$50.00
$150.00
$250.00
2
Repair Cost = (No. Defective per Batch) Repair Cost per Unit
Payoff
6634 CH08 UG 8/23/02 2:20 PM Page 66
EMV(node 2) (0.3)(50) (0.4)(150)
(0.3)(250)
15 60 75 150
b. Kuality Komponents should use supplier A (the highest
EMV).
c. (127 37) (150) $60 less than does supplier A.
8-28. a.
b. S
1
: survey favorable
S
2
: survey unfavorable
S
3
: study favorable
S
4
: study unfavorable
S
5
: market favorable
S
6
: market unfavorable
P(S
6
S
1
) 1.00 0.78 0.22
P(S
6
S
2
) 1.00 0.27 0.73
P(S
6
S
3
) 1.00 0.89 0.11
P(S
6
S
4
) 1.00 0.18 0.82
P S S ( | )
( . . )
( . . ) ( . . )
.
.
.
5 4
0 2 0 5
0 2 0 5 0 9 0 5
0 1
0 55
0 18

P S S ( | )
( . . )
( . . ) ( . . )
.
.
.
5 3
0 8 0 5
0 8 0 5 0 1 0 5
0 4
0 45
0 89

P S S ( | )
( . . )
( . . ) ( . . )
.
.
.
5 2
0 3 0 5
0 3 0 5 0 8 0 5
0 15
0 55
0 27

P S S ( | )
( . . )
( . . ) ( . . )
.
.
.
5 1
0 7 0 5
0 7 0 5 0 2 0 5
0 35
0 45
0 78

3
Favorable Market
Unfavorable Market
Produce
Do Not Produce Razor
Payoff
$95,000
$65,000
$5,000
Razor
4
Favorable Market
Unfavorable Market
Produce
$95,000
$65,000
$5,000
Razor
Survey
Favorable
Survey
Unfavorable
5
Favorable Market
Unfavorable Market
Produce
$80,000
$80,000
$20,000
2
Razor
6
Favorable Market
Unfavorable Market
Produce
$80,000
$80,000
$20,000
Razor
7
Favorable Market
Unfavorable Market
Produce
$100,000
$60,000
$0
Razor
Study
Study
Conduct
Pilot
Favorable
Study
Unfavorable
N
e
i
t
h
e
r

T
e
s
t
C
o
n
d
u
c
t

S
u
r
v
e
y
1
Figure for Problem 8-28a
3
1
(0.78)
(0.22)
(0.45)
(0.55)
4
(0.27)
(0.73)
5
2
(0.89)
(0.11)
(0.45)
(0.55)
6
(0.18)
(0.82)
7
(0.5)
(0.5)
Figure for Problem 8-28b
6634 CH08 UG 8/23/02 2:20 PM Page 67
c. See le P8-28.XLS for the TreePlan solution of this problem.
The calculations are as follows:
EMV (node 3) (95,000)(0.78)
(65,000)(0.22) $59,800
EMV (node 4) (95,000)(0.27)
(65,000)(0.73)
$21,800
EMV (node 5) (80,000)(0.89)
(80,000)(0.11)
$62,400
EMV (node 6) (80,000)(0.18)
(80,000)(0.82)
$51,200
EMV (node 7) (100,000)(0.5)
(60,000)(0.5)
$20,000
EMV (conduct survey) (59,800)(0.45)
(5,000)(0.55)
$24,160
EMV (conduct pilot survey) (62,400)(0.45)
(20,000)(0.55)
$17,080
EMV (neither test) 20,000
Therefore, the best decision is to conduct the survey and follow
the outcome.
8-29. Bob has two major decisions to make. First, he must decide
whether or not to conduct the survey. After this decision, he must de-
cide whether to develop a small, medium, or large waste disposal fa-
cility. Of course, Bob always has the option of not building any facil-
ity, with an expected monetary value of 0. To solve this problem, we
will look at a decision tree in the gure for Problem 8-29 (shown on
the next page) involving no survey and then another decision tree in-
volving the use of a survey. The decision branches that represent the
highest expected monetary value will be the chosen plan of action.
If no survey is to be conducted, the decision tree is fairly
straightforward. There are three main decisions, which are building
a small, medium, or large facility. Extending from these decision
branches are three possible demands, representing the possible
states of nature. The demand for this type of facility could be either
low, medium, or high. It was given in the problem that the proba-
bility for a low demand is 0.15. The probabilities for a medium and
a high demand are 0.40 and 0.45, respectively. The problem also
gave monetary consequences for building a small, medium, or
large facility when the demand could be low, medium, or high for
the facility. These data are reected in a decision tree on the next
page. Using the data in the decision tree, we can multiply the
appropriate probabilities times the economic consequences for a
small, medium, or a large facility. That alternative that maximizes
the expected monetary value will be chosen. The results follow.
No survey (analysis values in hundreds of thousands of dollars):
FACILITY
Probability Demand Small Medium Large
0.15 Low 500 200 200
0.4 Medium 500 700 400
0.45 High 500 800 1,000
EMV 500 670 580
As seen from the analysis above, the expected monetary val-
ues for the small, medium, and large facilities are $500,000,
$670,000, and $580,000. The medium facility, with an expected
monetary value of $670,000, is selected because it represents the
highest expected monetary value.
We are still not done with solving the problem. We also have
to look at the situation of performing the survey. The most difcult
part of this problem is the computation of the revised probabilities
using Bayes law. For each alternative facility, three revised proba-
bilities must be computed, representing low, medium, and high
demand for a facility. These probabilities can be computed using
tables. One table is used to compute the probabilities for low sur-
vey results, another table is used for medium survey results, and a
nal table is used for high survey results. These tables are shown
below.
For low survey resultsA
1
:
State of
Nature P(B
i
) P(A
i
B
j
) P(B
j
and A
i
) P(B
j
A
i
)
B
1
0.150 0.700 0.105 0.339
B
2
0.400 0.400 0.160 0.516
B
3
0.450 0.100 0.045 0.145
P(A
1
) 0.310
For medium survey resultsA
2
:
State of
Nature P(B
i
) P(A
i
B
j
) P(B
j
and A
i
) P(B
j
A
i
)
B
1
0.150 0.200 0.030 0.082
B
2
0.400 0.500 0.200 0.548
B
3
0.450 0.300 0.135 0.370
P(A
2
) 0.365
For high survey resultsA
3
:
State of
Nature P(B
i
) P(A
i
B
j
) P(B
j
and A
i
) P(B
j
A
i
)
B
1
0.150 0.100 0.015 0.046
B
2
0.400 0.100 0.040 0.123
B
3
0.450 0.600 0.270 0.831
P(A
3
) 0.325
6634 CH08 UG 8/23/02 2:20 PM Page 68
The right-hand sides of these tables contain the needed condi-
tional probabilities that are required in the analysis. You should
note that these tables also compute the probability of the various
states of nature occurring. The probability of low survey results,
for example, is seen at the bottom of the rst table to be 0.310. In a
similar fashion, the probabilities for medium survey results and
high survey results are 0.365 and 0.325, respectively. These prob-
abilities can then be used along with the conditional probabilities
in selecting the best decision. This can be done by determining the
expected monetary value for the small, medium, and large facility
when the survey results are low, medium, and high.
The analysis is shown below.
Small
Medium
Large
L
M
H
L
M
H
L
M
H
250,000
350,000
950,000
150,000
650,000
750,000
450,000
450,000
450,000
Small
Medium
Large
L
M
H
L
M
H
L
M
H
250,000
350,000
950,000
150,000
650,000
750,000
450,000
450,000
450,000
Small
Medium
Large
L
M
H
L
M
H
L
M
H
250,000
350,000
950,000
150,000
650,000
750,000
450,000
450,000
450,000
$646,000
Medium
survey
(0.365)
$
4
9
5
,
0
0
0
L
o
w

s
u
r
v
e
y

(
0
.
3
1
0
)
$
8
2
1
,
0
0
0
H
i
g
h

s
u
r
v
e
y

(
0
.
3
2
5
)
Decision TreeSurvey
(0.15)
(0.40)
(0.45)
$200,000
$700,000
$800,000
(0.15)
(0.40)
(0.45)
$500,000
$500,000
$500,000
(0.15)
(0.40)
(0.45)
$200,000
$400,000
$1,000,000
S
m
a
ll $
5
0
0
,0
0
0
Medium $670,000
L
a
r
g
e
$
5
8
0
,0
0
0
Decision TreeNo survey
Survey results are low:
FACILITY
0.339 Low 450,000 150,000 250,000
0.516 Medium 450,000 650,000 350,000
0.145 High 450,000 750,000 950,000
EMV 450,000 495,000 233,600
Maximum EMV $495,000
Survey results are medium:
FACILITY
0.082 Low 450,000 150,000 250,000
0.548 Medium 450,000 650,000 350,000
0.378 High 450,000 750,000 950,000
EMV 450,000 646,000 522,800
Survey results are high:
FACILITY
0.046 Low 450,000 150,000 250,000
0.123 Medium 450,000 650,000 350,000
0.831 High 450,000 750,000 950,000
EMV 450,000 710,100 821,000
6634 CH08 UG 8/23/02 2:20 PM Page 69
If the survey results are low, the best decision is to build the
medium facility with an expected return of $495,000. If the survey
results are medium, the best decision is also to build the medium
plant with an expected return of $646,000. On the other hand, if the
survey results are high, the best decision is to build the large facility
with an expected monetary value of $821,000. Now, we can take
these results and multiply them times the probability of having low
survey results, medium survey results, and high survey results to get
the expected value of taking the survey and selecting the appropriate
decision. The results of these computations are shown below.
Final analysis:
Probability Demand
0.31 Low 495,000
0.365 Medium 646,000
0.325 High 821,000
EMV $656,065
As you can see from the analysis, the expected monetary value is
approximately $656,000. This is the expected monetary value for
conducting the survey and taking the appropriate action. Because
the expected monetary value for not conducting the survey is
greater, the decision is not to conduct the survey and to build the
medium-sized facility. The expected value from doing this, shown
in an earlier table, is $670,000. The solution of this problem using
TreePlan is shown in le P8-29.XLS.
8-30. EU(node 3) (0.95)(0.78) (0.5)(0.22) 0.85
EU(node 4) (0.95)(0.27) (0.5)(0.73) 0.62
EU(node 5) (0.9)(0.89) (0)(0.11) 0.80
EU(node 6) (0.9)(0.18) (0)(0.82) 0.16
EU(node 7) (1)(0.5) (0.55)(0.5) 0.78
EU(conduct survey) (0.85)(0.45)
(0.8)(0.55) 0.823
EU(conduct pilot study) (0.80)(0.45)
(0.7)(0.55) 0.745
EU(neither test) 0.81
Thus, the best decision is to conduct a survey and follow its out-
come. Jim is a risk avoider. (See gure for Problem 8-30.).
8-31.
EU(node 2) (0.82)(0.99) (0.18)(0) 0.8118
EU(node 3) (0.11)(0.99) (0.89)(0) 0.1089
EU(node 4) (0.5)(1) (0.5)(0.1) 0.55
EU(conduct survey) (0.55)(0.8118) (0.45)(0.7)
0.76149
EU (do not conduct survey) 0.9
Therefore, the medical professionals should not conduct the sur-
vey and should not construct the clinic. They are risk avoiders.
(See gure for Problem 8-31 on the next page).
3
Market Favorable (0.78)
Market Unfavorable (0.22)
0.85
0.82
0.70
Utility
0.95
0.5
4
0.62
0.95
0.5
0.8
5
0.80
6
0.16
7
0.78
2
Produce
Razor
Produce
Razor
Produce
Razor
Produce
Razor
Produce
Razor
0.8
0.9
0
0.9
0
0.7
0.7
1
0.55
0.81
Survey
Favorable
(0.45)
Survey
Unfavorable
(0.55)
Study
Favorable
(0.45)
Study
Unfavorable
(0.55)
Conduct
Pilot
Study
N
e
i
t
h
e
r

T
e
s
t
C
o
n
d
u
c
t

S
u
r
v
e
y
1
6634 CH08 UG 8/23/02 2:20 PM Page 70
8-32.
EU(large plant survey favorable) (0.78)(0.95)
(0.22)(0)
0.741
EU(small plant survey favorable)
(0.78)(0.5) (0.22)(0.10) 0.39 0.022
0.412
EU(no plant survey favorable) 0.2
EU(large plant survey negative)
(0.27)(0.95) (0.73)(0) 0.2565
EU(small plant survey negative)
(0.27)(0.5) (0.73)(0.10) 0.135 0.073
0.208
EU(no plant survey negative) 0.2
EU(large plant no survey) (0.5)(1) (0.5)(0.05)
0.5 0.025 0.525
EU(small plant no survey) (0.5)(0.6) (0.5)(0.15)
0.3 0.075 0.375
EU(no plant no survey) 0.3
EU(conduct survey) (0.45)(0.741)
(0.55)(0.2565) 0.33345 0.1411
0.4745
EU(no survey) 0.525
Johns decision would changehe would not conduct the survey
and build the large plant.
8-33.
a. Expected travel time on Broad Street 40 0.5
15 0.5, or 27.5 minutes. Broad Street has a lower expected
travel time.
b. Expected utility on Broad Street 0.2 0.5 0.9
0.5 0.55. Therefore, the expressway maximizes utility.
c.
Lynn is a risk avoider.
8-34.
Restaurant Utility
Old Tavern 1
Big Burger 0
Ralphs Diner 0.5 0.5 0 0.5 1
Vacation Inn 0.75 0.5 0.5 0.5 1
8-35.
Jack should accept his kids bet.
U = 0.76
2
U = 0.8118
1
Construct
Clinic
Do Not Construct Clinic
$95,000
$45,000
$5,000
0.99
Payoff Utility
0
0.7
Survey
Favorable
(0.55)
Survey
Unfavorable
(0.45)
3
U = 0.1089
Construct
Clinic
$95,000
$45,000
$5,000
0.99
0
0.7
4
U = 0.55
Construct
Clinic
$100,000
$40,000
$0
1.0
0.1
0.9
C
o
n
d
u
c
t
M
a
r
k
e
t
S
u
r
v
e
y
D
o

N
o
t

C
o
n
d
u
c
t
S
u
r
v
e
y
Congestion (0.5)
No
Congestion (0.5)
Expressway
Broad
Street
30 Minutes,
U = 0.7
40 Minutes,
U = 0.2
15 Minutes,
U = 0.9
1
0 10 20 30 40
0
0.2
0.4
0.6
0.8
1.0
Time (minutes)
U
t
i
l
i
t
y
See 3
VWS (0.2)
Do Not See
3 VWS (0.8)
Accept
Bet
Do Not
Accept Bet
0
0.75
1
Expected Utility
of Accepting Bet
= 0 0.2 + 1 0.8
= 0.8 > 0.75
6634 CH08 UG 8/23/02 2:20 PM Page 71
8-36.
Let X probability at indifference, where
EU(bet) EU(no bet)
(X)(0) (1 X)(1) 0.75
0 1 X 0.75
X 0.25
8-37.
a. Sue can use decision tree analysis to nd the best solu-
tion. The decision tree is drawn in sheet #1 in le P8-37.XLS
using TreePlan. In this case, the best decision is to get infor-
mation. If the information is favorable, she should build the
retail store. If the information is not favorable, she should not
build the store. The EMV for this decision is $29,200.
b. The suggested change is reected in the appropriate
branches of the decision tree (see sheet #2 in le P8-37.XLS).
The decision stays the same but the EMV increases to
$37,400.
c. The suggested change is reected in the appropriate
branches of the decision tree (see sheet #3 in le P8-37.XLS).
Given the new probability values, Sues best decision is to
build the retail store without getting additional information.
The EMV for this decision is $28,000.
d. Yes. With the higher cost of information, Sues decision
would change. She should no longer get the additional infor-
mation, and build the retail store straightaway. The EMV for
this decision is $28,000 (see sheet #4 in le P8-37.XLS).
e. The expected utility can be computed by replacing all
payoff values at the end of the decision tree by the utility val-
ues (see column S in sheet #5 in le P8-37.XLS). The ex-
pected utility is 0.62 corresponding to a decision of building
the retail store without getting additional information. The
utility values represent a risk seeker.
f. In this case too, the expected utility can be computed by
replacing all payoff values at the end of the decision tree by
the utility values (see column S in sheet #6 in le P8-
37.XLS). The expected utility is 0.80, and again corresponds
to a decision of building the retail store without getting addi-
tional information. The utility values represent a risk avoider.
SOLUTION TO SKI RIGHT CASE
1. Bob can solve this case using decision analysis. The results
are as follows. As you can see, the best decision is to have
Leadville Barts make the helmets and have Progressive Products
do the rest with an expected value of $2,600. The nal option of
not using Progressive, however, was very close with an expected
value of $2,500.
The maximum expected monetary value is 2,600 given by Option
2 LB and PP.
2 and 3. The opportunity loss and the expected value of perfect
information is presented below. The EVPI is $15,300.
Eat at Big
Burger (X)
Eat at Old
Tavern (1 X)
Eat at
Vacation Inn
Bet
Do Not Bet
0
0.75
1
Utility
Solution to Ski Right Case (See le P8-Ski.XLS)
Poor ($) Average ($) Good ($) Excellent ($) EMV
Option 1PP 5,000 2,000 2,000 5,000 700
Option 2LB and PP 10,000 4,000 6,000 12,000 2600
Option 3TR and PP 15,000 10,000 7,000 13,000 900
Option 4CC and PP 30,000 20,000 10,000 30,000 1000
Option 5LB, CC, and TR 60,000 35,000 20,000 55,000 2500
Perfect Information
Poor Market Average Good Excellent
Perfect Information 5,000 2,000 20,000 55,000
Perfect* probability 500 600 8,000 11,000
The expected value with perfect information 17,900
The expected monetary value 2,600
The expected value of perfect information 15,300
6634 CH08 UG 8/23/02 2:20 PM Page 72
4. There are a number of options that Bob did not consider. See
if you can list one or more of these options.
SOLUTION TO THE BLAKE ELECTRONICS CASE
1. By employing basic decision theory, Steves problem is
solved quite easily. He needs no additional information for its so-
lution. In fact, Iverstine and Kinards gures are more suitable for
manipulation than are MAIs.
2. Steves problem involves three decisions. First, should he
contract the services of an outside research agency? Second,
should he employ MAI or Iverstine and Kinard, if a survey is war-
ranted? Third, in any case, should the new product line be intro-
duced?
By using the probabilities stated in the case, some expected
values can be derived. Then these expected values can be com-
pared and a decision can be made. This is the basis of decision
theory that will be used to reach a conclusion.
To facilitate the solving of this problem, several variables
will be dened here.
S
i
states of nature
where i 1 connotes a favorable outcome from the introduc-
tion of the product line, and i 2 connotes an unfavor-
able outcome.
A
j
decisions
where j 1 means survey will be done
j 2 means no survey will be undertaken
j 3 means MAI will be employed
j 4 means Iverstine and Kinard (I&K) will be
employed
j 5 means product will be introduced
j 6 means product will not be introduced
I
k
survey predictions
where k 1 means MAI predicts a favorable outcome
k 2 means MAI predicts an unfavorable outcome
k 3 means I&K predicts a favorable outcome
k 4 means I&K predicts an unfavorable outcome
P(I
k
S
i
) conditional probability; probability of I
k
given S
i
P(S
i
I
k
) probability of S
i
given I
k
The following tables give the probabilities of a pertinent
nature.
Table A
State of Probability of
Nature Occurrence
S
1
(fav.) 0.6
S
2
(unfav.) 0.4
The values in Table A were given by Blake Electronics own
research staff. Given that the product line is introduced, it has a
60% chance of success and a 40% chance of failure.
MAI predicted favorable outcomes 50 out of 100 (50%)
times (35 15 50). Given that the actual outcome was success-
ful, MAI predicted that outcome 35 times out of 50 (70%), which
means that MAI was wrong 30% of the time (100% 70%) it
predicted a favorable outcome. Similarly, 30 out of 50 times
(60%) MAI correctly predicted an unfavorable outcome. It follows
that 40% of the time, the rm was incorrect in predicting an unfa-
vorable outcome. See Table B.
Table B
MAIs Conditional Probabilities P(S
i
I
k
)
STATE OF NATURE
Survey Predictions S
1
S
2
I
1
0.70 0.40
I
2
0.30 0.60
It was given in the case that 90% of the time I&K made a cor-
rect favorable prediction; and 80% of the time the rm made a
correct unfavorable prediction. The other two probabilities follow
logically. See Table C.
Table C
I&K Conditional Probabilities P(I
k
S
i
)
STATE OF NATURE
Survey Predictions S
1
S
2
I
3
0.90 0.20
I
4
0.10 0.80
For simplicity, the entire problem is drawn in decision tree
form. Using the decision tree, expected values will be found and
compared working from right to left.
First, assuming that no survey is done (A
2
), the expected
value of introducing the product line (expected return) can be de-
termined. The case says that sales can be increased by $2 million.
However, the cost of developing the product ($500,000) must be
Regret or Opportunity Loss
Poor Market Average Good Excellent EOL
Option 1PP 0 0 18,000 50,000 17,200
Option 2LB and PP 5,000 2,000 14,000 43,000 15,300
Option 3TR and PP 10,000 8,000 13,000 42,000 17,000
Option 4CC and PP 25,000 18,000 10,000 25,000 16,900
Option 5LB, CC, and TR 55,000 33,000 0 0 15,400
The minimum EOL is $15,300, and corresponds to option 2-LB and PP.
6634 CH08 UG 8/23/02 2:20 PM Page 73
subtracted from that gure to arrive at a gure for total benet for
a favorable outcome. That gure is $1,500,000. If the product is
introduced and an unfavorable outcome materializes, the cost of
developing the product becomes a loss ($500,000). Table D
computes the expected return for introducing the product and for
not introducing it.
Table D
Payoff Table (Prot)
Prior State of Dont
Probabilities Nature Introduce Introduce
0.6 S
1
$1,500,000 0
0.4 S
2
500,000 0
EXPECTED
PROFIT $ 700,000 0
E(P) 0.6(1,500,000) (0.4)(500,000)
900,000 (200,000) $700,000
The expected return for introducing the product is greater than
for not introducing it. Therefore, the product should be introduced
if no survey is done. (See decision tree for pictorial explanation.)
The problem, however, is still not solved. Two decisions re-
main: (1) Will a survey help? If so, (2) Who should do the survey?
An evaluation of expected returns is necessary here, too. With the
surveys, the decision to not introduce the product line still has an
expected return of 0 [E(A
6
) 0]. (See the decision tree.) An eval-
uation of expected returns is necessary and requires Bayes law.
where P(I
k
) P(I
k
S
1
)P(S
1
) P(I
k
S
2
)P(S
2
).
The additional probabilities needed are computed below:
P(S
1
I
1
) .7, given in problem
P(S
2
I
1
P(S
1
I
2
P(S
2
I
2

P S I ( | )
( . )( . )
( . )( . ) ( . )( . )
.
.
.
2 3
0 2 0 4
0 9 0 6 0 2 0 4
0 08
0 62
0 13

P S I ( | )
( . )( . )
( . )( . ) ( . )( . )
.
.
.
1 3
0 9 0 6
0 9 0 6 0 2 0 4
0 54
0 62
0 87

P S I
P I S P S
P I
i k
k i i
k
( | )
( | ) ( )
( )
$596,400
$700,000
$700,000
$0
$1.24 mil
$0.3 mil
$0.9 mil
$0.6
mil
$0.7688
mil
$700,000
$0.18
mil
$1.24
mil
$0.3
mil
$0.9
mil
*
A
1
A
2
A
5
A
6
S
1
A
4
A
3
A
5
A
6
A
5
A
6
A
5
A
6
A
5
A
6
S
1
(.7)
S
2
(.3)
S
1
(.4)
S
2
(.6)
S
1
S
2
S
1
S
2
I
3
(0.62)
I
4
(0.38)
I
1
(0.5)
I
2
(0.5)
S
2
($1.5 million)
($0.5 million)
($1.5 million)
($0.5 million)
($1.5 million)
($0.5 million)
($1.5 million)
0.6($1.5 mil)
0.4($0.5 mil)
($0.5 million)
decisions to be made
probabilities encountered
decision not chosen
cost of survey
(
$
1
0
0
,
0
0
0
)
*
(
$
3
0
0
,
0
0
0
)
*
Figure for Blake Electronic Case
6634 CH08 UG 8/23/02 2:20 PM Page 74
The expected value can be found on the decision tree.
After an expected return is calculated for each rm, the cost
of the study must be subtracted.
E(MAI) $696,400
Cost of survey 100,000
Actual return $596,400
E(I&K) 768,800
Cost 300,000
Return 468,800
Since the MAI survey reaps a greater expected prot, its return
is compared with that calculated assuming no survey is undertaken
($700,000). Since $700,000 is greater than $596,400, no survey
should be undertaken and the product line should be introduced.
SOLUTIONS TO INTERNET CASES
Starting Right
This is a decision-making-under-uncertainty case. There are two
events: a favorable market (event 1) and an unfavorable market
(event 2). There are four alternatives, which include do nothing
(alternative 1), invest in corporate bonds (alternative 2), invest in
preferred stock (alternative 3), and invest in common stock (alter-
native 4). The decision table is presented below. Note that for
alternative 2, the return in a good market is $30,000 (1 0.13)
5
the initial investment of $30,000 $25,273. The return in a
good market is (4 $30,000) $30,000 $90,000 for alterna-
tive 3, and (8 $30,000) $30,000 $210,000 for alternative 4.
P S I ( | )
( . )( . )
( . )( . ) ( . )( . )
.
.
.
2 4
0 8 0 4
0 1 0 6 0 8 0 4
0 32
0 38
0 84 =
+
= =
P S I ( | )
( . )( . )
( . )( . ) ( . )( . )
.
.
.
1 4
0 1 0 6
0 1 0 6 0 8 0 4
0 06
0 38
0 16 =
+
= =
Solutions: (See le P8-Starting.XLS)
Hurwicz a coefcient: 0.110
a. Sue Pansky is a risk avoider and should use the maximin
decision approach. She should do nothing and not make an
investment in Starting Right.
b. Ray Cahn should use a coefcient of realism of 0.11.
The best decision is to do nothing.
c. Lila Battle should eliminate alternative 1 of doing noth-
ing and apply the maximin criterion. The result is to invest in
the corporate bonds.
d. George Yates should use the equally likely decision cri-
terion. The best decision for George is to invest in common
stock.
e. Pete Metarko is a risk seeker. He should invest in com-
mon stock.
f. Julia Day can eliminate the preferred stock alternative
and still offer alternatives to risk seekers (common stock)
and risk avoiders (doing nothing or investing in corporate
bonds).
Drink-at-Home, Inc.
Abbreviations and values used in the following decision trees:
Normalproceed with research and development at a normal
pace
6 MonthAdopt the 6-month program: if a competitors product
is available at the end of 6 months, then copy; otherwise
proceed with research and development.
8 MonthAdopt the 6-month program: proceed for 8 months; if
no competition at 8 months, proceed; otherwise stop
development
Success or failure of development effort:
OkDevelopment effort ultimately a success
NoDevelopment effort ultimately a failure
Column:
SSales revenue
Rresearch and development expenditures
Event 1 Event 2
Alternative 1 0 0
Alternative 2 25,273 10,000
Alternative 3 90,000 15,000
Alternative 4 210,000 30,000
Laplace
Alternative Expected Value
1 0.0
2 7,636.5
3 37,500.0
4 90,000.0
Maximin
Alternative Expected Value
1 0
2 10,000
3 15,000
4 30,000
Maximax
Alternative Maximax Payoff
1 0
2 25,273
3 90,000
4 210,000
kbest
kbest
kbest
Hurwicz
Alternative Hurwicz Payoff
1 0.00
2 6,119.97
3 3,450.00
4 3,600.00
kbest
kbest
Minimax
Alternative Maximum Regret
1 210,000
2 184,727
3 120,000
4 30,000
6634 CH08 UG 8/23/02 2:20 PM Page 75
EEquipment costs
IIntroduction to market costs
Market size and Revenues:
Without With
Competition Competition
SSubstantial (P .1) $800,000 $400,000
MModerate (P .6) $600,000 $300,000
LLow (P .3) $500,000 $250,000
Competition:
C
6
Competition at end of 6 months (P .5)
No C
6
No competition at end of 6 months (P .5)
C
8
No C
8
C
12
No C
12
S (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
C
12
(.8)
C
8
(.6)
C
6
(.5)
No C
12
(.2)
No C
8
(.4)
Ok (.9)
Ok (.9)
No (.1) (Stop)
No (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
C
12
(.8)
No C
12
(.2) No C
6
(.5)
Ok (.9)
No (.1)
L (.3)
M (.6)
8 Month
6

M
o
n
t
h
400 100 100 150 = 50
300 100 100 150 = 50
250 100 100 150 = 100
800 100 100 150 = 450
600 100 100 150 = 250
500 100 100 150 = 150
100 = 100
100 = 100
80 = 80
400 140 100 150 = 10
300 140 100 150 = 90
250 140 100 150 = 140
800 140 100 150 = 410
600 140 100 150 = 210
500 140 100 150 = 110
400 90 100 150 = 60
300 90 100 150 = 40
250 90 100 150 = 90
400 100 100 150 = 50
300 100 100 150 = 50
250 100 100 150 = 100
800 100 100 150 = 450
600 100 100 150 = 250
500 100 100 150 = 150
Mkt S R E I
Normal
6634 CH08 UG 8/23/02 2:20 PM Page 76
S (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
C
12
(.8)
C
8
(.6)
C
6
(.5)
No C
12
(.2)
No C
8
(.4)
Ok (.9)
Ok (.9)
No (.1) (Stop)
No (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
C
12
(.8)
No C
12
(.2) No C
6
(.5)
Ok (.9)
No (.1)
L (.3)
M (.6)
Normal
8 Month
6

M
o
n
t
h
50
50
100
450
250
150
100
100
80
10
90
140
410
210
110
60
40
90
50
50
100
450
250
150
Mkt
S (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
C
12
(.8)
C
8
(.6)
C
6
(.5)
No C
12
(.2)
No C
8
(.4)
Ok (.9)
Ok (.9)
No (.1) (Stop)
No (.1)
L (.3)
M (.6)
S (.1)
L ( .3)
M (.6)
S (.1)
L (.3)
M (.6)
S (.1)
C
12
(.8)
No C
12
(.2)
No C
6
(.5)
Ok (.9)
No (.1)
L (.3)
M (.6)
Normal 6.4
8 Month 74.2
6

M
o
n
t
h
50
50
100
450
250
150
100
100
80
10
90
140
410
210
110
60
40
90
50
50
100
450
250
150
Mkt
(4)
(74.2)
(19.3)
55
240
240
95
55
45
200
Drink-at-Home, Inc. Case (continued)
The optimal program is to adopt the 6-month program.
6634 CH08 UG 8/23/02 2:20 PM Page 77
Ruth Jones Heart By-Pass Operation
Expected survival rate with surgery (5.95 years) exceeds the non-
surgical survival rate of 2.70 years. Surgery is favorable.
Toledo Leather Company
1. Machine 1
(Semiautomated)
Capacity 5 days/wk 50 wks/yr
.
Sales price $6/unit.
T.C./case $1.50 (material)
$2.50(v.c.) $4(no overtime used)
T.C./case (with overtime) $1.50
$2.50 $1.20 $5.20
Cost of machine $250,000
Cost to modify $15,000
Volume Prot
120k ($6 4)(120k) $240k
130k ($6 4)(130k) $260k
140k (capacity) ($6 4)(140k) $280k
150k (capacity) $280k (80/overtime unit)
(10k) $288k
150k (modify) ($6 4)(150k) $15k $280k
160k (overtime) $280k (80/unit)(20k) $296k
160k (modify) ($6 4)(160k) $15k $305k
( ) , / yr. 640
1
8
640 140 000
Machine 2
(Automated)
Capacity 5 days/wk 50 wks/yr
Sales price $6/unit.
T.C./case $1.50
$1.75(v.c.) $3.25(no overtime used)
T.C./case (with overtime) $1.50
$1.75 $0.90 $4.15
Cost of machine $350,000
Cost to modify $20,000
Volume Prot
120k ($6 3.25)(120k) $330k
130k ($6 3.25)(130k) $357k
140k ($6 3.25)(140k) $385k
150k (capacity) ($6 3.25)(150k) $412.5k
160k (overtime) $412.5k (6 4.15)(20k) $431k
160k (modify) ($6 3.25)(160k) $20k $420k
( ) , units/ yr. 800
1
4
800 150 000
S
u
r
g
e
r
y
N
o

B
y
-
p
a
s
s
S
u
r
g
e
r
y
One Year
Two Years
Five Years
Eight Years
One Year
0 Years
Five Years
Ten Years
Twenty Years
Fifteen Years
Twenty-five
Years
.50
.20
.20
.10
.45
.05
.20
.13
.05
.08
.04
1
2
5
8
1
0
5
10
20
15
25
.50
.40
1.00
.80
.45
0.0
1.00
1.30
1.00
1.20
1.00
5.95 years
2.7 years
Prob. Years Expected Rate
6634 CH08 UG 8/23/02 2:20 PM Page 78
2. Payoff Matrix
States of NaturePayoff in $1,000s
Alternative $120k $130k $140k $150k (OT) $160k (OT)
Machine 1 240 260.0 280 288.0 296
Machine 2 330 357.5 385 412.5 431
(a) Maximax: $296k $250k $46k
$431k $350k $81k kmaximax (Machine 2)
(b) Maximin: $240k $250k $10k kmaximin (Machine 1)
$330k $350k $20k
(c) Equally likely: Machine 1 $272.8k $250k $22.8k
Machine 2 $383.2k $350k $33.2k k(Machine 2)
Volume = 120,000 (0.15)
Volume = 120,000 (0.15)
V = 130,000 (0.25)
V = 140,000 (0.40)
V = 130,000 (0.25)
V = 140,000 (0.40)
V = 150,000 (0.15)
V = 160,000 (0.05) Overtime
Modify
$376,300
$271,450
$240k
$260k
$280k
$288k
$285k
$296k
$305k
$330k
$385k
$431k
$420k
$357.5k
$412.5k
Overtime
Modify
Overtime
Modify
(Machine 1)
Semiautomated
$250,000
cost
(Machine 2)
Automated
$350,000
cost
$21.450
$26.300
$26.300
V = 150,000 (0.15)
V = 160,000 (0.5)
6634 CH08 UG 8/23/02 2:20 PM Page 79

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SOLUTIONS TO DISCUSSION QUESTIONS

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