Discuss basis of making a capacity decision

What information does a decision maker need in order to perform an expected-value analysis of

a problem? What options are available to the decision maker if the probabilities of the states of

nature are unknown? Can you think of a way you might use sensitivity analysis in such a case?

12. Suppose a manager is using maximum EMV as a basis for making a capacity decision and, in the

process, obtains a result in which there is a virtual tie between two of the seven alternatives. How

is the manager to make a decision?

13. Identify three potential unethical actions or inactions related to decision analysis and the ethical

principle each violates (see Chapter 1).

DISCUSSION AND

REVIEW QUESTIONS

PROBLEMS

1. A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm’s capacity. The contractor must now make a decision on capacity for next

year. Estimated profits under each of the two possible states of nature are as shown in the table

below. Which alternative should be selected if the decision criterion is:

a. Maximax?

b. Maximin?

c. Laplace?

d. Minimax regret?

NEXT YEAR’S

DEMAND

Alternative Low High

Do nothing $50* $60

Expand 20 80

Subcontract 40 70

*Profit in $ thousands.

2. Refer to Problem 1. Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high demand: P(low) = .3 and P(high) = .7.

a. Determine the expected profit of each alternative. Which alternative is best? Why?

b. Analyze the problem using a decision tree. Show the expected profit of each alternative on the

tree.

c. Compute the expected value of perfect information. How could the contractor use this

knowledge?

3. Refer to Problems 1 and 2. Construct a graph that will enable you to perform sensitivity analysis on

the problem. Over what range of P(high) would the alternative of doing nothing be best? Expan