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Decision Analysis

The document presents an analysis of long-run demand for different plant sizes, comparing small and large plants based on various decision-making approaches: optimistic, conservative, and minimax. The optimistic approach suggests a maximum payoff of $500 million for the large plant, while the conservative approach indicates a minimum payoff of $150 million for the small plant. The expected value approach recommends the small plant size with an expected value of $182.5 million, highlighting its superior performance compared to the large plant.

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Ira Grace De Castro
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84 views2 pages

Decision Analysis

The document presents an analysis of long-run demand for different plant sizes, comparing small and large plants based on various decision-making approaches: optimistic, conservative, and minimax. The optimistic approach suggests a maximum payoff of $500 million for the large plant, while the conservative approach indicates a minimum payoff of $150 million for the small plant. The expected value approach recommends the small plant size with an expected value of $182.5 million, highlighting its superior performance compared to the large plant.

Uploaded by

Ira Grace De Castro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Ira Grace B. De Castro.

ACN1 | CAED101

Long-Run Demand
Plant Size Low (s1) Medium (s2) High (s3)
Small (d1) 150 200 200
Large (d2) 50 200 500

Table 1. Minimum and Maximum Payoff Values

Plant Size Minimum Payoff Maximum Payoff


Small 150 200
Large 50 500

A. Optimistic Approach

Maximum of the maximum payoff values – Large Plant = $500,000,000

B. Conservative Approach

Maximum of the minimum payoff values – Small Plant = $150,000,000

C. Minimax Approach

Table 2. Opportunity Loss or Regret

State of Nature
Decision Alternative Low (s1) Medium (s2) High (s3)
0 0 300
Small (d1)
(150 – 150) (200 – 200) (500 – 200)
100 0 0
Large (d2)
(150 – 50) (200 – 200) (500 – 500)

Table 3. Maximum Regret for Each Alternative

Decision Alternative Maximum Regret


Small (d1) 300
Large (d2) 100

Minimum of the maximum regret – Large Plant = $100,000,000


State of Nature
Decision Alternative (s1) (s2) (s3)
(d1) 250 100 25
(d2) 100 100 75

EV (di) = ∑𝑁
𝑗=1 𝑃(𝑆𝑗 )𝑉𝑖𝑗

EV (d1) = 0.65(250) + 0.15(100) + 0.20(25) = 162.5 + 15 + 5 = 182.5 ∿ $182,000,000


EV (d2) = 0.65(100) + 0.15(100) + 0.20(75) = 65 + 15 + 15 = 95 ∿ $95,000,000
Under the expected value approach (without perfect information), the small plant size (d1) is the
recommended decision with an expected value of $182,500,000.

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