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Decision Theory - Sheet1

Under the maximax approach, the best decision is to manufacture keyboards to achieve the highest potential sales of 110. Under the maximin approach, the best decision is to buy keyboards from a local manufacturer to minimize losses at -30 in the worst case. Under the Laplace approach, the best decision is to buy keyboards from Japan to achieve the average sales of 45. Under the Hurwicz approach (α=60%), the best decision is to manufacture keyboards to achieve the weighted average sales of 54. Under the minimax regret approach, the best decision is to buy keyboards from Japan to minimize the maximum regret of 30.

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50 views2 pages

Decision Theory - Sheet1

Under the maximax approach, the best decision is to manufacture keyboards to achieve the highest potential sales of 110. Under the maximin approach, the best decision is to buy keyboards from a local manufacturer to minimize losses at -30 in the worst case. Under the Laplace approach, the best decision is to buy keyboards from Japan to achieve the average sales of 45. Under the Hurwicz approach (α=60%), the best decision is to manufacture keyboards to achieve the weighted average sales of 54. Under the minimax regret approach, the best decision is to buy keyboards from Japan to minimize the maximum regret of 30.

Uploaded by

studentone
Copyright
© © All Rights Reserved
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CASE 1

1. MAXIMAX 2. MAXIMIN

Future Sales Level Future Sales Level


Alternatives Best Payoff Alternatives Worst
Low Moderate High Low Moderate High
Manufacture -30 20 110 110 Manufacture -30 20 110 -30
Buy from Local 20 60 50 60 Buy from Local 20 60 50 20
Buy from Japan 10 45 80 80 Buy from Japan 10 45 80 10

Decision: Manufacture Decision: Buy from Local


Under the maximax approach, the best decision for the company is to Under the maximin approach, the best decision for the company is to buy
manufacture its own keyboard, the company will have higher sales with a from a local manufacturer for the keyboard, even if the demand will not be
higher cost. as high but is less costly.

3. LAPLACE 4. HURWICZ (𝛼 = 60% as coefficient of realism)

Future Sales Level Future Sales Level Weighted


Alternatives Average Alternatives
Low Moderate High Low Moderate High Average
Manufacture -30 20 110 33 Manufacture -30 20 110 54
Buy from Local 20 60 50 43 Buy from Local 20 60 50 44
Buy from Japan 10 45 80 45 Buy from Japan 10 45 80 52

Decision: Buy from Japan 𝛼 = 0.6 Weighted Ave = (110*0.6)+((-30)*0.4)


1- 𝛼 = 0.4 (best x 𝛼) + (worst x 1-𝛼)
Under the laplace approach, the best decision for the company is to buy its
keyboard from Japan so that the company will have higher sales.
Decision: Manufacture
Under the hurwicz approach, the best decision for the company is to
manufacture its own keyboard, the company will have higher sales with a
higher cost.
5. MINIMAX REGRET

Future Sales Level


Alternatives
Low Moderate High
Manufacture -30 20 110
Buy from Local 20 60 50
Buy from Japan 10 45 80

Regret = Best payoff - Payoff received


Future Sales Level Maximun
Alternatives
Low Moderate High Regret
Manufacture 50 40 0 50
Buy from Local 0 0 60 60
Buy from Japan 10 15 30 30

Decision: Buy from Japan

Under the minimax regret approach, the best decision for the company is to
buy the keyboard from Japan for the company to have higher sales.

CASE 2

in (1,000,000)
Program Responses
Air Program
Accepted Failed
Cost 1 1
Income 3 -1.3
Probability 59 - 41

Expected Value = 52.7


Decision: Air the Program

Solution:
Accepted = ((59-41)*3) + (-1.3)

Answer: 52.7

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