Decision Theory

Decision Theory

Problem Set 1

DT1 B.F. Retread, a tire manufacturer, wants to select one of three feasible prototype designs for a new tire; A, B, C.

| | |Sales Event | |

|Demand |Low |Medium |High |

|Probability |.30 |.50 |.20 |

|A |120,000 |255,000 |390,000 |

|B |130,000 |295,000 |460,000 |

|C |100,000 |300,000 |480,000 |

| | | | |

a. What is the best optimistic decision?

a. What is the best cautious decision?

a. What is the best decision in order to minimize losses?

a. Determine the maximum expected payoff.

a. Calculate the highest value you would pay for a highly reliable forecast.

a. What is the minimum expected loss?

DT2 Venus Flycatcher Company sells exotic plants and is trying to decide which of two hybrid plants to introduce into their product line.

| |Demand | |

|Probabilities |.4 |.3 |.3 | |

|Hybrid/Demand |Low |Medium |High | |

|Hybrid 1 | -10,000 |10,000 |30,000 | |

|Hybrid 2 | -15,000 |10,000 |35,000 | |

| | | | | |

a. If Venus wants to maximize expected...