Exercise 7 Week 10 Chapter 6 part A Part 1: Luna, a former class mate of Kiana's, has developed a new product called the Cat Castle. Luna came to Kiana for advice on how she should evaluate her options. Kiana suggested they develop a payofftable and then use it to evaluate her options. First, they had to determine the Decision Alternatives, States of nature and payoffs. Luna was trying to decide between: (1) Sell the product to another company and move to the beach, (2) Hire SBPR to market and distribute the product, (3) Market the product herself and sell on Amazon. Selling the product directly, she can sell it for $45,000. If she chooses to hire SBPR to market and distribute the product, her payoff will depend on the economic environment (or states of nature). If the economy is "good", then the estimated payoff to Luna is $85,000. "Moderate" economy is estimated to have a payoff of 60,000. "Bad" economy is estimated to have a payoff of $35,000 and if there is "Financial Crisis", Luna would lose $500. If she chooses to market the product herself and sell on Amazon, her payoffs are as follows: If there is "good" economy, she estimates a payoff to be $100,000. "Moderate" economy is estimated to have a payoff of $70,000. "Bad" economy is estimated to have a payoff of $40,000 and "Financial Crisis "would cost Luna $15,000. Questions: fill in the answers to the following questions 1) What are the decision alternatives? What are the States of Nature? What are the payoffs? The decision alternative are: sell the product to other compsny, Hire SBPR, Her own self Market The states of nature are: Good econmy, Moderate economy, Bad Economy and Financial Crises Build the payoff table on Excel and label these items. 2) What's the best decision based on Maximin? 3) What's the best decision based on Maximax? 4) Laplace? 5) Minimax Regret? Part II: Jason, an economist friend has done research on the future economic environment and has determined that there is 30% chance of good economy, a 45% chance of moderate economy, a 20% chance of bad economy, and 5% chance of financial crisis. Questions: 1) What is the expected payoff if Luna choose to hire SBPR to market and distribute the product? 2) Calculate the EVUPI. 3) What is the EVPI? 4) What is the best decision for Luna based on Expected Opportunity Loss(EOL)? Payoff table State of Nature Good Economy Moderate Economy Bad Economy 45000 45000 45000 Financial Crisis 45000 Decision Alternatives Sell to another company Hire SBPR to market and distribute the product Market the product herself and sell on Amazon, 85000 60000 35000 100000 70000 40000 -15000 DM under Ignorance Maximin State of Nature Moderate Economy Good Economy Bad Economy Financial Crisis Min Decision Alternatives Sell to another company Hire SBPR to market and distribute the product Market the product herself and sell on Amazon, Maximax State of Nature Moderate Economy | Good Economy Bad Economy | Financial Crisis Max Decision Alternatives Sell to another company Hire SBPR to market and distribute the product Market the product herself and sell on Amazon, Laplace State of Nature Good Economy Financial Crisis Average Moderate Economy | Bad Economy $ Decision Alternatives Sell to another company Hire SBPR to market and distribute the product Market the product herself and sell on Amazon, Exercise 7 Week 10 Chapter 6 part A Part 1: Luna, a former class mate of Kiana's, has developed a new product called the Cat Castle. Luna came to Kiana for advice on how she should evaluate her options. Kiana suggested they develop a payofftable and then use it to evaluate her options. First, they had to determine the Decision Alternatives, States of nature and payoffs. Luna was trying to decide between: (1) Sell the product to another company and move to the beach, (2) Hire SBPR to market and distribute the product, (3) Market the product herself and sell on Amazon. Selling the product directly, she can sell it for $45,000. If she chooses to hire SBPR to market and distribute the product, her payoff will depend on the economic environment (or states of nature). If the economy is "good", then the estimated payoff to Luna is $85,000. "Moderate" economy is estimated to have a payoff of 60,000. "Bad" economy is estimated to have a payoff of $35,000 and if there is "Financial Crisis", Luna would lose $500. If she chooses to market the product herself and sell on Amazon, her payoffs are as follows: If there is "good" economy, she estimates a payoff to be $100,000. "Moderate" economy is estimated to have a payoff of $70,000. "Bad" economy is estimated to have a payoff of $40,000 and "Financial Crisis "would cost Luna $15,000. Questions: fill in the answers to the following questions 1) What are the decision alternatives? What are the States of Nature? What are the payoffs? The decision alternative are: sell the product to other compsny, Hire SBPR, Her own self Market The states of nature are: Good econmy, Moderate economy, Bad Economy and Financial Crises Build the payoff table on Excel and label these items. 2) What's the best decision based on Maximin? 3) What's the best decision based on Maximax? 4) Laplace? 5) Minimax Regret? Part II: Jason, an economist friend has done research on the future economic environment and has determined that there is 30% chance of good economy, a 45% chance of moderate economy, a 20% chance of bad economy, and 5% chance of financial crisis. Questions: 1) What is the expected payoff if Luna choose to hire SBPR to market and distribute the product? 2) Calculate the EVUPI. 3) What is the EVPI? 4) What is the best decision for Luna based on Expected Opportunity Loss(EOL)? Payoff table State of Nature Good Economy Moderate Economy Bad Economy 45000 45000 45000 Financial Crisis 45000 Decision Alternatives Sell to another company Hire SBPR to market and distribute the product Market the product herself and sell on Amazon, 85000 60000 35000 100000 70000 40000 -15000 DM under Ignorance Maximin State of Nature Moderate Economy Good Economy Bad Economy Financial Crisis Min Decision Alternatives Sell to another company Hire SBPR to market and distribute the product Market the product herself and sell on Amazon, Maximax State of Nature Moderate Economy | Good Economy Bad Economy | Financial Crisis Max Decision Alternatives Sell to another company Hire SBPR to market and distribute the product Market the product herself and sell on Amazon, Laplace State of Nature Good Economy Financial Crisis Average Moderate Economy | Bad Economy $ Decision Alternatives Sell to another company Hire SBPR to market and distribute the product Market the product herself and sell on Amazon