Decision Analysis
When it is known for certain which of the possible future conditions will actually happen, the decision is usually relatively straightforward: Simply choose the alternative that has the best payoff under that state of nature. Although complete certainty is rare in such situations, this kind of exercise provides some perspective on the analysis. Moreover, in some instances, there may be an opportunity to consider allocation of funds to research efforts, which may reduce or remove some of the uncertainty surrounding the states of nature.
A decision tree is a schematic representation of the alternatives available to a decision maker and their possible consequences. The term gets its name from the treelike appearance of the diagram. Although tree diagrams can be used in place of a payoff table, they are particularly useful for analyzing situations that involve sequential decisions
Problem# 1
Problem# 2
Problem# 3
Problem# 4
Problem#5
Kenneth Brown is the principal owner of Brown oil Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by a factor over 100. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. Ken is planning to purchase one of the three equipment:
i. Sub 100: If there is a favorable market, he will realize a profit of $ 300,000 on one hand, if the market is unfavorable; ken will suffer a loss of $ 200,000.
ii. Oiler J: If there is a favorable market, he will realize a profit of $250,000 on one hand, if the market is unfavorable, Ken will suffer a loss of $ 100,000
iii. Texan: If there is a favorable market, he will realize a profit of $ 75,000 on one hand, if the market is unfavorable; Ken will suffer a loss of $ 18,000.
1) Construct a decision Table
2) Construct Decision Tree
3) Which Equipment you will recommend to Ken to purchase under the following criterion:-
a) Optimistic
b) Pessimistic
c) Minimax Regret
d) Equally Likely
4) If the probability of Favorable market is 0.35 which equipment will recommend to Ken based in Expected Monetary Value Criteria.