Assignment Decision Support Tools
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Added on 2020-04-01
Assignment Decision Support Tools
Added on 2020-04-01
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DECISION SUPPORT TOOLSASSIGNMENT - III[Pick the date]Student id
Question 1(a)Decision under certainty refers to a situation when the concerned decision maker is inpossession of complete information about the various aspects of the decision such as thealternative available and also the relative costs and benefits associated with each of thesealternatives. Decision making under certainty is quite easy and often based on establishedconventions on how to deal with such issues (Eriksson, & Kovalainen, 2015).On the contrary for decision under risk, some information is available about the futureoutcomes but it could not be ascertained as to which outcome would be observed. This is amore often faced decision making situation by the manager in comparison to decision undercertainty. The managers tend to work out the respective probabilities for the various outcomesbased on the available information and hence tend to map using decision tree as to whatdecision would bring the largest possible profits for the company (Holsapple & &Whinston,2013). Decision making under complete uncertainty refers to a situation when no information siavailable about the potential outcomes and hence the subjective probabilities of these cannotbe determined. These are most difficult to tackle considering the absence of information andhence this situation usually requires creative solution from the managers which deviates fromthe established techniques (Medhi, 2001). b) 1) The optimist would choose investing in share market.MaximumMaximumShare Market$80,000 Best Bonds$30,000Real Estate$25,0002) The pessimist would choose investing in bond market.MinimumMaximumShare Market-$20,000Bonds$20,000 BestReal Estate$15,0003) Based on criterion of regret investing in real estate would be chosen.1
GoodEconomyPoorEconomyMaximumMinimumStock Market040,00040,000Bonds50,000050,000Real Estate55,0005,00055,000Best4) Expected monetary value (Stock Market) = 0.3*80000 + 0.7*(-20000) = $ 10,000Expected monetary value (Bonds) = 0.3*30000 + 0.7*20000 = $ 23,000Expected monetary value (Real estate) = 0.3*25000 + 0.7*15000 = $ 18,000Hence, investment in bonds would be made.5) We use the following formulaEVPI=∑i=1S{maxU(si,a)}p(si)−E¿¿¿U/ a*)Hence, EVPI = 0.3*80000 + 0.7*20000 – 23000 = $ 15,000Question 2(a) The relevant computations are shown below.Favourable market(0.5 probability)Unfavourable market(0.5 probability)EMVMaximumLarge Shop$80,000-$40,00020,000BestSmall Shop$30,000-$10,00010,000In the given case, Jerry has two possibilities in the form of opening a large bicycle shop or toopen a small one. The respective profits from the shop under favourable and unfavourablemarket conditions have been listed (Power, 2002).EMV (Large Shop) = 80000*0.5 + (-40000)*0.5 = $ 20,0002
EMV (Small Shop) = 30000*0.5 + (-10000)*0.5 = $ 10,000Based on the above, Jerry should open a large bicycle shop.(b) The prior probability revision is indicated below.Good marketPoor marketFavourable Study0.80.4Unfavourable study0.20.61.01.0The probability revision when a favourable study has been indicated is shown below.Posterior ProbabilityState of natureConditionalProbabilityP (Favourablestudy/state of nature)PriorProbabilityJointprobabilityP (State ofNature/Favourablestudy)Good market0.8×0.5=0.40.40/0.60=0.67Poor market0.4×0.5=0.20.10/0.60=0.33Total0.60(0.4+0.2)1.00(0.67+0.33)The probability revision when a unfavourable study has been indicated is shown below.Posterior ProbabilityState of natureConditionalProbabilityP (Unfavourablestudy/state of nature)PriorProbabilityJointprobabilityP (State ofNature/Unfavourablestudy)Good market0.2×0.5=0.100.10/0.40=0.25Poor market0.6×0.5=0.300.30/0.40=0.75Total0.40(0.10+0.30)1.00(0.25+0.75)c) The posterior probability can be predicted using the following table.3
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