Exercise 2 - Decision Making Under Uncertainty and Risk: Consider the following decision matrix presenting net profit/loss estimates regarding an investment project: DEMAND LOW MEDIUM HIGH EQUIPMENT USED Small 35 55 60 Medium 30 50 61 Large -30 30 80 1. Considering that the probabilities applicable to demand are not known, show the decision recommendations from the points of view of perfect optimism; perfect pessimism; optimism at a = .8; conservatism (equal likelihood); and minimization regrets. Do you see a pattern? If so, which equipment would you choose? Explain. 2. Consider now that the probabilities for demand being low, medium and high have been calculated as .35, .25 and .40, respectively. By using a decision tree, find the expected value, the standard deviation, and the coefficient of variation foe each size of equipment. Which size of equipment would you recommend on the basis of the three coefficients of variation that you calculated? 3. Referring to the Z-Table, calculate the probability that each alternative (each different equipment) will turn out AT LEAST a $55 profit? What is the likelihood that each alternative will produce a profit BETWEEN $45 and $50? Solve ALL DMUU, DMUR and ND :: Be sure to show all work, indicate the recommended alternative each time, provide a summary table (see below), and support your final statement with a reason DMUU: MXMX: MXMN REAL'SM = Letter & Value Reason Equal Likelihood: Minimizing Regret: Overall DMUU: (Give Reasons!) DMUR: Results Xbar Sigma Cov ND 1. % ND 2. % SML MD LG Be Sure To Support Your Answers Give Reasons!) (Give Reasons!) 1 8