Operation Management: Decision making Under Risk and Uncertainty

(35 points) Decision Making Under Risk & Uncertainty. You are a nut farmer in California and are contemplating planting a new 100-acre orchard. You must choose to plant either Pistachios, Almonds or Walnuts. Assume, for simplicity, all three species yield 1.5 metric tons of nuts per acre, are productive for 20 years (beginning in 5 years for trees to reach maturity), and that the forecasted average wholesale prices over the productive period are $2/kg for pistachios, $1.5/kg for almonds, and $1/kg for walnuts. Pistachios consume 10m3 of water per kilogram, almonds consume 6.5m3 of water per kilogram, and walnuts consume 3.5m3 of water per kilogram. There is considerable uncertainty about the future price of agricultural water. If the price of water is High it will be $375/m. If the price of water is Medium it will be $275/m2. If the price of water is Low it will be $10/m. a. (7 points) Create the payoff table for annual profits (during productivity) Compute the following decisions AND associated payoffs/regret: b. (4 points) Maximax Payoff C. (4 points) Maximin Payoff d. (4 points) Minimax Regret (4 points) Maximum Expected Monetary Value f. (4 points) Minimum Expected Opportunity Loss e. Compute the following two quantities g. (4 points) Expected Profit from a Perfect Predictor h. (4 points) Expected Value of Perfect Information h