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Tutorial 2

1) The document presents a decision problem about whether to buy new machinery or modify existing machinery to produce product X. It provides a payoff table showing the profits and losses under different economic scenarios. 2) A decision tree is constructed to analyze the expected values of each option based on estimated probabilities of different economic conditions. The analysis recommends modifying existing machinery as it has the higher expected value. 3) Additional decision criteria are considered when probabilities are unknown: maximax favors buying new, maximin and equally likely favor modifying, and minimax regret also favors modifying.

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77 views

Tutorial 2

1) The document presents a decision problem about whether to buy new machinery or modify existing machinery to produce product X. It provides a payoff table showing the profits and losses under different economic scenarios. 2) A decision tree is constructed to analyze the expected values of each option based on estimated probabilities of different economic conditions. The analysis recommends modifying existing machinery as it has the higher expected value. 3) Additional decision criteria are considered when probabilities are unknown: maximax favors buying new, maximin and equally likely favor modifying, and minimax regret also favors modifying.

Uploaded by

maggie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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SEHS4610 Engineering Management

Tutorial Two

You must decide whether to buy a new machinery to produce product X or to modify existing
machinery. The applicable payoff table of profit (+) and losses (-) is:

N1: Prosperity ($) N2: Recession ($)

A1 : (Buy New) + 950,000 -200,000


A2 : (Modify) +700,000 +300,000
a) You believe the probability of a prosperous economy next year is 0.6 and of a recession is
0.4. Prepare a decision tree, and use it to recommend the best course of action.
b) If you have no idea of the economic probabilities (pj), what would be your decision based on
uncertainty using (i) maximax, (b) maximin, (c) equally likely, and (d) minimax regret
assumptions?
a)
Decision Chance (Outcome) x (Probability) = Expected Value Ei
node Ai node Nj (Oij) (Pj)
Prosperity: (+950,000) x (0.6) = +570,000
+ =+490,000
Buy New
Recession:
(-200,000) x (0.4) = -80,000

Prosperity: (+700,000) x (0.6) = +420,000


Modify
+ =+540,000
Recession: (+300,000) x (0.4) = +120,000

Since the expected value of modifying the existing machinery is higher than buying a new one,
modify the existing machinery is recommended.
b)
Alternative Maximum Minimum Equally Likely
A1 : (Buy New) +950,000 -200,000 375,000
A2 : (Modify) +700,000 +300,000 500,000
−200,000 + 950,000
𝐸1 = = 375,000
2
+700,000 + 300,000
𝐸2 = = 500,000
2
State of Nature
Alternative N1: Prosperity ($) N2: Recession ($) Maximum Regret
A1 : (Buy New) 0 500,000 500,000
A2 : (Modify) 250,000 0 250,000

(i) maximax: A1
(ii) maximin: A2
(iii) Equally Likely: A2
(iv) Maximum Regret: A2

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