UNIVERSITY OF TECHNOLOGY, JAMAICA

FACULTY OF BUSINESS AND MANAGEMENT

SCHOOL OF BUSINESS ADMINISTRATION
DECISION SCIENCE
TUTORIAL WORKSHEET
DECISION ANALYSIS
Problem # 1
T. Bone Puckett has acquired a textile company on Marcus Garvey Drive and is
considering the capacity of the plant to satisfy future orders. Given the following
conditional value table, determine the appropriate decision under uncertainty – i.e., the
decision maker does not know the probability of the outcomes – using
a) Maximax (optimistic)
Best of the best: $350,000 $180,000 $110,000 $0 The ans is: Build a new plant

b) Maximin (pessimistic)
Best of the worst: -$300,000 -$20,000 -$10,000 $0
The answer is: Do nothing because you are breaking even

c) Laplace (Equally Likely)

D1: $350,000 + $240,000 + (-$300,000) /3 = $96,666.667
D2: $180,000 + $90,000 + (-$20,000) /3 = $83,333.333
D3: $110,000 + $60,000 + (-$10,000) /3 = $53,333.333
D4: $0 + $0 + $0 / 3 = $0

d) Minimax Regret
Alternatives Very Favorable Average Unfavorable Market Maximum
Market Market Regret
Build new $350,000 - $350,000 = $0 $0 – (-$300,000) = $300,000
plant $0 $300,000
Subcontract $350,000 - $180,000 = $150,000 $20,000 $170,000
$170,000
Overtime $240,000 $180,000 $10,000 $240,000
Do nothing $350,000 $240,000 $0 $350,000

________________________________________________________________________
States of Nature
________________________________________
Very Favorable Average Unfavorable
Alternatives Market Market Market
Build new plant $350,000 $240,000 -$300,000
Subcontract $180,000 $ 90,000 -$ 20,000
Overtime $110,000 $ 60,000 -$ 10,000
Do nothing $ 0 $ 0 $ 0

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Problem #2
A Farmer in St. Elizabeth must decide which crop to plant next year on his land: corn,
peanuts, or red peas. The return from each crop will be determined by whether a new
trade bill with CARICOM is passed in Parliament. The profit the farmer will realize
from each crop, given the two possible results on the trade bill is shown in the following
payoff table:
___________________________________________________
Trade Bill
_____________________________________
Crop Pass Fail
____________________________________________________
Corn $35,000 $ 8,000
Peanuts 18,000 12,000
Red Peas 22,000 20,000
___________________________________________________
Determine the best crop to plant, using the following information:
a) Maximax
Best of the best: $35,000 $18,000 $22,000. Ans: Plant Corn

b) Maximin
Best of the worst: $8,000 $12,000 $20,000. Ans: Plant Red Peas

c) Minimax Regret

Crop Pass Fail Maxi Reg

_____________________________________________________________
Corn $35,000 (0) $ 8,000 (12,000) 12,000
Peanuts 18,000 (17,000) 12,000 (8,000) 17,000
Red Peas 22,000 (13,000) 20,000 (0) 13,000

d) Equal likelihood
D1: (35,000 + 8,000)/ 2 = 21,500
D2: (18,000 + 12,000)/ 2 = 15,000
D3: (22,000 + 20,000)/ 2 = 21,000

Problem # 3.

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 A local real estate investor in Montego Bay is considering three alternative investments:
a guest house, a restaurant, or a night club. Profits from the guest house or restaurant will
be affected by the availability of gasoline and the number of tourists; profits from the
night club will be relatively stable under any conditions. The following table shows the
profit or loss that could result from each investment:

Gasoline Availability
_______________________________________________________

Investment Shortage Stable Supply Surplus

Guest house -$8,000 $15,000 $20,000
Restaurant 2,000 8,000 6,000
Night Club 6,000 6,000 5,000

Determine the best investment, using the following decision criteria.

a) Maximax
Best of the best: $20,000 $8,000 $6,000 (Guest house/Surplus)

b) Maximin-
Best of the worst: -$8,000 $2,000 $5,000 Night Club for a payoff of $5,000

c) Minimax Regret
Investment Shortage Stable Supply Surplus
Guest house -$8,000 (14,000) $15,000 (0) $20,000 (0) 14,000
Restaurant 2,000 (4,000) 8,000 (7,000) 6,000 (14,000) 14,000
Night Club 6,000 (0) 6,000 (9,000) 5,000 (15,000)
15,000

d) Equally Likely
D1: (-8,000 + 15,000 + 20,000)/ 3 = $9,000
D2: (2,000 + 8,000 + 6,000)/ 3 = $5,333.333
D3: (6,000 + 6,000 + 5,000)/ 3 = $5,666.667

1 to 3- Uncertainty (no prob regarding state of nature)

4 up risks

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 Problem # 4
Maria Rowe is considering the possibility of opening a small dress shop on Fairbanks
Avenue, a few blocks from the university. She has located a good mall that attracts
students. Her options are to open a small shop, a medium-sized shop, or no shop at all.
The market for a dress shop can be good, average, or bad. The probabilities for these
three possibilities are 0.2 for a good market, 0.5 for an average market, and 0.3 for a bad
market. The net profit or loss for the medium-sized and small shops for the various
market conditions are given in the table below. Building no shop at all yields no loss and
no gain. What do you recommend?

ALTERNATIVE GOOD MARKET AVERAGE BAD MARKET ($)

($) MARKET ($)
Small Shop 75,000 25,000 - 40,000
Medium-sized Shop 100,000 35,000 - 60,000
No Shop 0 0 0

Expected money value = Probability * pay off value

EMV = P * V
ALTERNATIVE GOOD MARKET AVERAGE BAD MARKET ($) EMV
($) MARKET ($)
Small Shop 75,000 * 0.2 = 25,000 * 0.5 = 12,500 - 40,000 * 0.3 15,000 +
15,000 = -12,000 12,500 +
(-12,000)
= 15,500
Medium-sized Shop 100,000 * 0.2 = 35,000 * 0.5 = 17,500 - 60,000 * 0.3 19,500
20,000 = -18,000
No Shop 0 * 0.2 = 0 0 * 0.5 = 0 0 * 0.3 = 0 0

Using the Expected Money Value Approach, we find that the Medium-sized shop, with
an expected money value of $19,500 is the recommended decision

Problem # 5

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 The Big Traders Company is going to introduce one of three new products: a widget, a
hummer, or a nimnot. The market conditions (favourble, stable, or unfavourable)
will determine the profit or loss the company realizes, as shown in the following
payoff table:

___________________________________________________
Market Conditions
________________________________________
Favorable Stable Unfavorable
Product .2 .7 .1
____________________________________________________
Widget $120,000 $70,000 -$30,000
Hummer 60,000 40,000 20,000
Nimnot 35,000 30,000 30,000
____________________________________________________

a) Compute the expected value for each decision and select the best one.
Favorable Stable Unfavorable EMV
Product .2 .7 .1
Widget $120,000 (24,000) $70,000 (49,000) -$30,000 (-3,000) 70,000
Hummer 60,000 (12,000) 40,000 (28,000) 20,000 (2,000) 42,000
Nimnot 35,000 (7,000) 30,000 (21,000) 30,000 (3,000) 31,000

b) Determine how much the firm would be willing to pay to a market

research firm to gain better information about future conditions.
Expected Value with Perfect Information (EVWPI)
(0.2*120,000) + (0.7*70,000) + (0.1*30,000) = 24,000 + 49,000 + 3,000 = 76,000

With perfect information expected profit would increase from $70,000 to $76,000

EVPI = EVWPI – EMV = $76,000 - $70,000 = $6,000

Problem # 6

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 Microcomp is a U.S. based manufacturer of personal computers. It is planning to build a
new manufacturing and distribution facility in with South Korea, China, Taiwan, the
Philippines, or Mexico. It will take approximately 5 years to build the necessary
infrastructure (roads, etc.,), construct the new facility, and put it into operation. The
eventual cost of the facility will differ between countries and will even vary with
countries depending on the financial, labor, and political climate, including monetary
exchange rates. The company has estimated the facility cost (in $1,000,000s) in each
country under three different future economic and political climates, as follows:

Economic/Political Climate
________________________________
Country Decline Same Improve
South Korea 21.7 19.1 15.2
China 19.0 18.5 17.6
Taiwan 19.2 17.1 14.9
Philippines 22.5 16.8 13.8
Mexico 25.0 21.2 12.5
PROBAILITY 0.4 .50 .10

A global economist hired by Microcomp, estimates that the probability that the economic
and political climate overseas and in Mexico will decline during the next 5 years
is 0.4, the probability that it will remain approximately the same is 0.50, and the
probability that it will improve is 0.10.

Determine:
a) The best country to construct the new facility in and
South Korea: (0.4*21.7) + (0.5*19.1) + (0.1*15.2) = 19.75
China: (0.4*19) + (0.5*18.5) + (0.1*17.6) = 18.61
Taiwan: (0.4*19.2) + (0.5*17.1) + (0.1*14.9) = 17.72 (Lowest cost) EMC
Philippines: (0.4*22.5) + (0.5*16.8) + (0.1*13.8) = 18.78
Mexico: (0.4*25) + (0.5*21.2) + (0.1*12.5) = 21.85

b) The expected value of perfect information

EVPI = Expected cost without perfect information – EC With PI
EC with PI = (0.4*19) + (0.5*16.8) + (0.1*12.5) = 17.25

EVPI= 17.72 - 17.25 = $0.47M

Problem #7

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 a) Use the Expected Money Value approach to determine the optimal
decision based on the information below.
STATE OF NATURE
Decision Alternative S1 S2 S3
d1 25 19 -2.0
d2 10 16 -8.5
The decision maker has obtained the probability assessments:
P (S1 ) = 0.65, P(S2) = 0.15 and P(S3 ) = 0.20.

Decision S1 (0.65) S2 (0.15) S3 (0.20) EMV

Alternative
d1 16.25 2.85 -0.4 16.25+2.85+(-0.4) = 18.7
d2 6.5 2.4 -1.7 6.5+2.4+(-1.7) = 7.2

b) Use the data above to calculate the Expected Value of Perfect

Information.
EVPI = EVWP – EMV = 18.7 – 18.7 = 0
EVWP = (0.65*25) + (0.15*19) + (0.20*-2) = 18.7

Problem #8
Consider the pay-off table below. Assume that the following probabilities
are specified for the states of nature.
P(1) = 0.1 ; P(2) = 0.4; and P(3) = 0.3 .
P(4) = 1 – (P1+P2+P3) = 1- (0.1+0.4+0.3) = 1- 0.8 = 0.2

← STATE OF NATURE ➔
DECISION S1 S2 S3 S4
d1 35 21 25 12
d2 27 25 20 18
D3 22 26 21 28
d4 20 25 28 33

a. Find the decision that maximizes the expected net dollar return.
0.1 0.4 0.3 0.2 EMV
d1 3.5 8.4 7.5 2.4 (3.5+8.4+7.5+2.4) = 21.8
d2 2.7 10 6 3.6 22.3

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D3 2.2 10.4 6.3 5.6 24.5
d4 2 10 8.4 6.6 27

b. Find the decision that minimizes the expected net dollar return. D1
c. Use the data above to calculate the Expected Value of Perfect
Information.
EVPI (PROFIT) = EVWPI – EMV = 28.9 – 27 = 1.9
EVWPI = (0.1*35) + (0.4*26) + (0.3*28) + (0.2*33) = 28.9

EVPI (COST) = EMC - EVWPI = 21.8 – 18.8 = 3

ECVPI = (0.1*20) + (0.4*21) + (0.3*20) + (0.2*12) = 18.8

EXCEL PROBLEMS

1. Abc Inc. must make a decision on its current capacity for next year. Estimated
profits (in $000’s) based on next year’s demand are shown in the table below.

Next Year’s Demand

Alternative Low High

Expand $100 $200

Subcontract $50 $120
Do Nothing $40 $50

a. Which alternative should be chosen based on the maximax criterion?

b. Which alternative should be chosen based on the maximin criterion?
c. Which alternative should be chosen based on the Laplace criterion?
d. Which alternative should be chosen based on the minimax regret criterion

2. Refer to problem 1. Assume ABC Inc. has hired a marketing research firm that
provided additional information regarding next year’s demand. Suppose that the
probabilities of low and high demand are assessed as follows: P(Low) = 0.4 and
P(High) = 0.6.

a. Which alternative should be chosen using the expected monetary value (EMV)
criterion?
b. What is the expected value under certainty?
c. What is the expected value under perfect information (EVPI)?

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 3. A bakery must decide how many apple-pies to prepare for the upcoming
weekend. The bakery has the option to make 50, 100 or 150 apple-pies. Assume
that the demand for the pies can be 50, 100, or 150. Each pie costs $5 to make
and sells for $7. Unsold pies are donated to a nearby charity centre. Assume that
there is no opportunity cost for the lost sales.

a. Which alternative should be chosen based on the maximax criterion?

b. Which alternative should be chosen based on the maximin criterion?
c. Which alternative should be chosen based on the Laplace criterion?
d. Which alternative should be chosed based on the minimax regret criterion?

4. Assume that the bakery (problem 3 above) has obtained the following probability
information regarding the demand for pies: P(50) = 0.3, P(100) = 0.5, and P(150)
= 0.2
a. Which alternative should be chosen using the expected monetary value
(EMV) criterion?
b. What is the expected value under certainty?
c. What is the expected value under perfect information (EVPI)?

5. AAA auto supply store sells rough terrain tires which are ordered every Friday to
meet next week’s demand. The sales price for the most popular size is $50 per
tire and it costs for AAA is $$35. If too many tires are ordered AAA incurs an
inventory carrying cost of $2 per tire. If AAA is out of stock, it forgoes the
profits from missed sales. AAA has the option to order 100, 150, or 200 tires to
meet next week’s demand which can be either 100, 150, or 200 tires.

a. Which alternative should be chosen based on the Maximax criterion?

The 200 tires alternative: $1,500, $2,250, $3,000

b. Which alternative should be chosen based on the maximin criterion?

The 100 tires alternative: $1,500, -$350, -$2,200

c. Which alternative should be chosen based on the Laplace criterion?

100 tires: (1,500 + 1,500 + 1,500) /3 = 4,500 / 3 = $1,500
150 tires: (-350 + 2,250 + 2,250) / 3 = 4,150 / 3 = $1,383.333
200 tires: (-880 +120 + 3,000) / 3 = 2,240 / 3 = 746.667

d. Which alternative should be chosen based on the minimax criterion?

Maximum Regret
100 $1,500 – 1,500 = 0 2,250 - $1,500 = 3,000 - $1,500 = 2,500
750 2,500
150 1,500 – (-$350) = 2,250 - $2,250 = 0 3,000 - $2,250 = 1,850

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 1,850 750
200 1,500 – (-$880) = 2,250 – 120 = 3,000 - $3,000 = 2,380
2,380 2,130 0

e. Based on its historical demand distribution, assume that AAA Inc has determined
the following probability information: P(100) = 0.4 P(150) = 0.3, and P(200) = 0.3
i. Which alternative should be chosen using the expected monetary value
(EMV) criterion?
ii. What is the expected value under certainty?
iii. What is the expected value under perfect information (EVPI)?

States of Nature (Demand)

P (100) = 0.4 P (150) = 0.3 P (200) = 0.3 EMV
$1,500*0.4 =600 $1,500*0.3= $1,500*0.3 600 + 450 + 450 = 1,500
450 =450
-$350*0.4 = -140 $2,250*0.3 = $2,250*0.3 = -140 + 675 + 675 = 1,210
675 675
-$2,200*0.4 = - $400*0.3 = 120 $3,000*0.3 = -880 + 400 + 900 = 420
880 900

EVPI = EVWP – EMV = 2,175 - 1,500 = $675

EVWP = (O.4*1,500) + (0.3*2,250) + (0.3*3,000) = 600 + 675 + 900 = $2,175

Alternatives States of Nature (Demand)

100 150 200
100 $1,500 $1,500 $1,500
150 -$350 $2,250 $2,250
200 -$2,200 $400 $3,000

Alternative (100)
100: Bought 100 tires * paid 35 = Total cost $3,500
Total Revenue = Demand * Price = 100 * $50 = $5,000
Profit = TR – TC = 5,000 – 3,500 = $1,500

150: People demanding 150 but you have 100 so revenue is still $1,500
200: only can sell what you have = $1,500

Alternative (150)
100: Total cost = 150 tires * $35 = 5,250 + (50 tires * 2) = 5,250 + 100 = $5,350
Total Revenue = Demand * Price = 100 * 50 = $5,000
Profit = 5,000 – 5,350 = -350
150: Total cost = 150 tires * $35 = 5,250
Total Revenue = 150 * 50 = $7,500
Profit = 7,500 – 5250 = $2,250
200: Profit = Remains the same don’t have so many tires
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Alternative (200)
100: TC = 200 tires * $35 = 7,000 + (100 * 2) = 7,000 + 200 = 7,200
TR = Demand * Price = 100 * 50 = 5,000
Profit = TR – TC = 5,000 – 7,200 = -$2,200
150: TC = 200 tires * $35 = 7,000 + (50 * 2) = 7,000 + 100 = 7,100
TR = Demand * Price = 150 * 50 = 7,500
Profit = TR – TC = 7,500 – 8,000 = $400
200:TC = 200 tires * 35 = 7,000
TR = Demand * Price = 200 * 50 = $10,000
Profit = TR – TC = 10,000 – 7,000 = $3,000

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