Construct a decision tree for the problem.

Question

The following payoff table shows profit for a decision analysis problem with two decision alternatives and three states of nature.

Answer 1

Question

Chapter 21.2, Problem 1E

a.

To determine

Construct a decision tree for the problem.

b.

To determine

Compute the optimal decision using the expected value approach.

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The following payoff table shows profit for a decision analysis problem with two decision alternatives and three states of nature.

Rick Miller has just opened a new bakery in Frisco, Colorado, called Morning Fresh. In performing an economic analysis, Rick has determined that the marginal cost or loss for each dozen doughnuts sold is $4. The marginal profit is estimated to be $2.75 per dozen doughnuts. At this time, Rick is considering stocking 10, 15, 20, 25 or 30 dozen doughnuts. The probability of selling 10 dozen doughnuts is 10%. The chance of selling 15 Dozen doughnuts is 20%. There is a 30% chance that Morning Fresh will sell either 20 or 25 dozen doughnuts. Finally, there is a 10% chance of selling 30 dozen doughnuts, which is considered by Rick to be the most that Morning Fresh would be able to accommodate. What is your recommendation to Rick ?

The following payoff table shows profit for a decision analysis problem with two decision alternatives and three states of nature: State of Nature Decision Alternative S1 S2 S3 di 250 100 100 d2 200 100 150 The probabilities for the states of nature are P(s1) = 0.45, P(s2) = 0.25, and P(53) = 0.3. (a) What is the optimal decision strategy if perfect information were available? S1 : - Select your answer - V S2 Select your answer - S3 : - Select your answer - V (b) What is the expected value for the decision strategy developed in part (a)? If required, round your answer to one decimal place. (c) Using the expected value approach, what is the recommended decision without perfect information? - Select your answer - v What is its expected value? If required, round your answer to one decimal place. (d) What is the expected value of perfect information? If required, round your answer to one decimal place.