EXPECTED VALUE AND UNCERTANTY Problem 1: Expected Value Determine whether you would decide, based on profitability, to go with the product cluster of Product A, Product B, and Product C or the product cluster of Product X, Product Y, and Product Z. Product A is expecting revenues of $800,000 and costs of $400,000. Product B is expecting revenues of $600,000 and costs of $150,000. Product C is expecting revenues of $700,000 and costs of $305,000. The probability of achieving these revenues and costs are 28% for Product A and 34% for Product C? I Product X is expecting revenues of $700,000 and costs of $200,000. Product Y is expecting revenues of $650,000 and costs of $250,000. Product Z is expecting revenues of $800,000 and costs of $425,000. The probability of achieving these revenues and costs are 35% for Product X and 31% for Product Z? Your goal is to maximize profits. Which product cluster would you choose? For any credit, you must show all your work. ANSWER: Uncertainty is when the outcomes are not certain and you are unable to estimate probabilities, but you use your psychological orientation to make decision. If you are optimistic you would make a "maximax" choice. If you are generally a pessimist, you would make a "maximin" choice. You also can make a choice that minimizes your maximum regret" or make a minimax choice. Use the following information and determine what would be your three choices based on the three psychological orientations (maximax, maximin, and minimax) Show all work. R1 R2 R3 Payoff Table Response: Strategy: Si S2 S3 S4 2232 2021 1598 2157 I 2156 1545 1718 2199 2199 1402 2209 2231 ANSWER: R2 R3 + Maximax: Optimistic Response: R1 Strategy: S1 S2 S3 S4 ANSWER: R2 R3 Maximin: Pessimistic Response: R1 Strategy: Si S2 S3 S4 Minimax: Regret Matrix Response: R1 Strategy: si ANSWER: R2 R3 S2 S3 S4 R1 R2 R3 Response: Strategy: Si S2 S3 S4