Assignment 4 – Summer2017 [Due Tuesday, 8/1/17] The Goodfellows Company is going
ID: 3293869 • Letter: A
Question
Assignment 4 – Summer2017 [Due Tuesday, 8/1/17]
The Goodfellows Company is going to introduce one of three new products: a widget, a hummer, or a nimnot. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes, as shown in the following payoff table:
Market Conditions
Product Favorable Stable Unfavorable
Widget $120,000 $80,000 $-30,000
Hummer 50,000 40,000 25,000
Nimnot 35,000 30,000 30,000
1. Draw a decision tree for the problem.
2. What is the decision to be made, and what is the chance event?
3. Determine which new product the company should introduce, using the following decision criteria:
a. Optimistic approach
b. Conservative approach
c. Minimax Regret approach
4. Suppose we now have some information about the market conditions in terms of probabilities. Specifically, P(favorable) = 0.3, P(stable) = 0.5, P(unfavorable) = 0.2.
a. Select the best product the company should introduce based on expected profit.
b. Determine the expected value of perfect information and interpret its value.
Explanation / Answer
Ans:
3a)Optimistic approach(Maximax approach)
Maximum of all respective maximums is 120000,which is paid off by Widget product.
So,company should produce Widget.
b)Conservative approach(Maximin approach)
Maximums of all respective minimums is 30000,which is paid off by Nimnot.
So,company should produce Nimnot.
c)Minimax regret approach
Minimum of repective maximum regrets is 60000,whic is given by Widget.
So,company should produce Widget.
4)
a)
Best Expected profit is given by Widget,so company should produce widget.
b)EVPI=EVwPI-EVwoPI
Expected value without perfect information(EVwoPI)=best expected profit=70000
Choose the best profit value in each scenario and multiply with respective probability to calculate EVwoPI:
Expected value with perfect information(EVwPI)=120000*0.3+80000*0.5+30000*0.2=82000
EVPI=82000-70000=12000
Favorable Stable Unfavourable Maximum Widget 120000 80000 -30000 120000 Hummer 50000 40000 25000 50000 Nimnot 35000 30000 30000 35000