problem 15 a,b,c,d and e

Chapter 13 Decision Analysis eveloped in part can troversy w ords the will be a shorwene for The probabilities for the states of nature are PS) 065. Px) 0.15 a. What is the optimal decision strategy il perfect information were avait b. What is the expected value for the decision strategy developed in c. Using the expected value approach, what is the recommended de fect information What is its expected value? d. What is the expected value of perfect information? 15. The Lake Placid Town Council decided to build a new community Cente conventions, concerts, and other public events, but considerable controver appropriate size. Many influential citizens want a large center that would be the area. But the mayor feels that if demand does not support such a center will lose a large amount of money. To provide structure for the decision pre cil narrowed the building alternatives to three sizes: small, medium, and are agreed that the critical factor in choosing the best size is the number of want to use the new facility. A regional planning consultant provided dem under three scenarios: worst case, base case, and best case. The worst case so responds to a situation in which tourism drops substantially, the base-case scen sponds to a situation in which Lake Placid continues to attract visitors at current the best-case scenario corresponds to a substantial increase in tourism. The consul provided probability assessments of 0.10.0.60, and 0.30 for the worst-case, base best-case scenarios, respectively. The town council suggested using net cash flow over a 5-year planning horizo criterion for deciding on the best size. The following projections of net cash flow in sands of dollars) for a 5-year planning horizon have been developed. All costs, includi the consultant's fee, have been included. on process, the con and large. Everybody ther of people who will fed demand estimates escenario COTTO current levels and Che consultantas case base-case, and Center Size Small Medium Large Worst Case 400 -250 -400 Demand Scenario Base Case 500 650 580 Best Case 660 800 990 a. What decision should Lake Placid make using the expected value approach? b. Construct risk profiles for the medium and large alternatives. Given the mayor's con- cern over the possibility of losing money and the result of part (a), which alternative would you recommend? c. Compute the expected value of perfect information. Do you think it would be worth trying to obtain additional information concerning which scenario is likely to occur! d. Suppose the probability of the worst-case scenario increases to 0.2, the probability of the base-case scenario decreases to 0.5, and the probability of the best-case sce nario remains at 0.3. What effect, if any, would these changes have on the decisio recommendation? e. The consultant has suggested that an expenditure of $150,000 on a promotional cam- paign over the planning horizon will effectively reduce the probability of the worst case scenario to zero. If the campaign can be expected to also increase the probabilis of the best-case scenario to 0.4, is it a good investment? 16. Consider a variation of the PDC decision tree shown in Figure 13.9. The company mu first decide whether to undertake the market research study. If the market research stuu conducted, the outcome will either be favorable (F) or unfavorable (U). Assume then only two decision alternatives, d, and d, and two states of nature, s, and 82. The po table showing profit is as follows