Section III: Decision Analysis (20 Points)
Unidyde is considering expansion of its Fort Myers
plant to produce a new chemical compound. The company is evaluating three
different expansion plans: Minor, moderate or major. They can, of course, also
do nothing. Long term profitability depends on future demand growth for the
chemical compound. The following payoff table gives the present worth of future
profitability (in $1,000) estimated by Unidyde
management. Please make the optimal decision based on each of the following
criteria. SHOW WORK.
|
Expansion Plan |
Demand Growth |
||
|
High |
Medium |
Low |
|
|
None |
0 |
0 |
0 |
|
Minor |
140 |
130 |
100 |
|
Moderate |
155 |
240 |
-300 |
|
Major |
200 |
125 |
-500 |
(a)(5 Points)Maximax
|
Expansion (Payoff) |
Demand Growth |
Decision Criterion
|
||
|
High |
Medium |
Low |
||
|
None |
0 |
0 |
0 |
|
|
Minor |
140 |
130 |
100 |
|
|
Moderate |
155 |
240 |
-300 |
|
|
Major |
200 |
125 |
-500 |
Decision:
(b) (5 Points)The Principle of Insufficient Reason
|
Expansion (Payoff) |
Demand Growth |
Decision Criterion
|
||
|
High |
Medium |
Low |
||
|
None |
0 |
0 |
0 |
|
|
Minor |
140 |
130 |
100 |
|
|
Moderate |
155 |
240 |
-300 |
|
|
Major |
200 |
125 |
-500 |
Decision:
(c)(5 Points)Minimax Regret (First develop the regret
table)
|
Expansion (Regret) |
Demand Growth |
Decision Criterion
|
||
|
High |
Medium |
Low |
||
|
None |
||||
|
Minor |
||||
|
Moderate |
||||
|
Major |
Decision:
(d) (5 Points)Expected Monetary Value
|
Expansion (Payoff) |
Demand Growth |
Decision Criterion
|
||
|
High |
Medium |
Low |
||
|
None |
0 |
0 |
0 |
|
|
Minor |
140 |
130 |
100 |
|
|
Moderate |
155 |
240 |
-300 |
|
|
Major |
200 |
125 |
-500 |
|
|
Probability |
0.3 |
0.4 |
0.3 |
Decision:
The
end of the exam.
