I. For the question #4 in Homework #1, we developed the following decision table
ID: 3043317 • Letter: I
Question
I. For the question #4 in Homework #1, we developed the following decision table for Ken who is the owner of OilCo. Answer the following questions based on this problem. States of Nature Alternatives Favorable Unfavorable Sub100 Oiler J Texan 290,000150,000 340,000 190,000 90,000 10,000 a) Which equipment should be selected based on the minimax regret criterion? The probabilities for the market have been determined to be 40% for favorable market and 60% for unfavorable market b) Which equipment should be selected to maximize the expected profit of the operation? c) What is the expected value of perfect information in this situation? d) Which equipment would minimize the expected opportunity loss?Explanation / Answer
Solution
(a) Minimax
Sub100 : 290,000
Oliver J : 340,000
Texan : 90,000
Minimum = Texan so decision is Texan
(b) Expected Profit
Sub 100 : 290,000*0.4+0.6*(-150,000) = 26,000
Oliver J : 340,000*0.4+ 0.6*(-190,000) = 22,000
Texan : 90,000*0.4+0.6*(-10,000) = 30,000
Decision = Texan (max EP)
(c) EVPI
EMV = 30,000
PI = 340,000*0.4-10,000*0.6 = 130,000
EVPI = 130,000-30,000 = 100,000
(d) EOL
Min EOL = Oliver J = -108,000
Fav Unfav Sub 10 50,000 -140,000 Oliver J 0 -180,000 Texan 250,000 0