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3. [-/1 Points] DETAILS ASWQUANT13 4.E.020. MY NOTES PRACTICE ANOTHER Embassy Publishing Company received a six-chapter manuscript for a new college textbook. The editor of the college division is familiar with the manuscript and estimated a 0.6519 probability that the textbook will be successful. If successful, a profit of $750,000 will be realized. If the company decides to publish the textbook and it is unsuccessful, a loss of $150,000 will occur. Before making the decision to accept or reject the manuscript, the editor is considering sending the manuscript out for review. A review process provides either a favorable (F) or an unfavorable (U) evaluation of the manuscript. Past experience with the review process suggests probabilities P(F) = 0.7 and P(U) = 0.3 apply. Let s, = the textbook is successful, and s, = the textbook is unsuccessful. The editor's initial probabilities of s, and s, will be revised based on whether the review is favorable or unfavorable. The revised probabilities are as follows: P(S, IF) = 0.75 P(s, [F) = 0.25 P(s, [U) = 0.423 P(s, [U) = 0.577 (a) Construct a decision tree assuming that the company will first make the decision of whether to send the manuscript out for review and then the decision to accept or reject the manuscript. (For each blank, enter the probability associated with the event.) Decision Tree Description . A decision tree begins at decision node 1 and an upper and lower branch extend from this node to the right. The upper branch, labeled "Review," stops at chance node 2 and an upper and lower branch extend from this node to the right. The lower branch, labeled "Do Not Review," stops at decision node 3 and an upper and lower branch extend from this node to the right. The upper branch extending from chance node 2 is labeled "Favorable," has an answer blank beneath it, and stops at decision node 4. The lower branch extending from chance node 2 is labeled "Unfavorable," has an answer blank beneath it, and stops at decision node 5. The upper branch extending from decision node 4, labeled "Accept," stops at chance node 7 and the lower branch, labeled "Reject," ends at a value of 0. The upper branch extending from decision node 5, labeled "Accept," stops at chance node 8 and the lower branch, labeled "Reject," ends at a value of 0. The upper branch extending from decision node 3, labeled "Accept," stops at chance node 6 and an upper and lower branch extend from this node to the right. The lower branch, labeled "Reject," ends at a value of 0. From top to bottom, the furthest right chance nodes are 7, 8, and 6. Each node has an upper branch and lower branch. Each upper branch is labeled "Success," has an answer blank beneath it, and ends at a value of 750. Each lower branch is labeled "Failure," has an answer blank beneath it, and ends at a value of -150. (b) Assuming the manuscript review process is free, using the expected value approach, determine the optimal decision strategy. O Always reject. O Always accept. O Review, and then always accept. O Do not review, and accept. O Review, and then accept if favorable or reject if unfavorable. (c) If the manuscript review costs $5,000, what is your recommendation? O Always reject. O Always accept. Review, and then always accept. O Do not review, and accept O Review, and then accept if favorable or reject if unfavorable. (d) What is the expected value of perfect information (in $)? EVPI = $ What does this EVPI suggest for the company? This EVPI suggest a better procedure for assessing the market potential for the textbook may bi v ---Select--- worthwhile Need Help? Read It not worthwhile3. [-/1 Points] DETAILS ASWQUANT13 4.E.020. MY NOTES PRACTICE ANOTHER Embassy Publishing Company received a six-chapter manuscript for a new college textbook. The editor of the college division is familiar with the manuscript and estimated a 0.6519 probability that the textbook will be successful. If successful, a profit of $750,000 will be realized. If the company decides to publish the textbook and it is unsuccessful, a loss of $150,000 will occur. Before making the decision to accept or reject the manuscript, the editor is considering sending the manuscript out for review. A review process provides either a favorable (F) or an unfavorable (U) evaluation of the manuscript. Past experience with the review process suggests probabilities P(F) = 0.7 and P(U) = 0.3 apply. Let s, = the textbook is successful, and s, = the textbook is unsuccessful. The editor's initial probabilities of s, and s, will be revised based on whether the review is favorable or unfavorable. The revised probabilities are as follows: P(s, [F) = 0.75 P(s, [F) = 0.25 P(s, [U) = 0.423 P(s,[U) = 0.577 (a) Construct a decision tree assuming that the company will first make the decision of whether to send the manuscript out for review and then the decision to accept or reject the manuscript. (For each blank, enter the probability associated with the event.) Decision Tree Description Success 750 Accept Failure - -150 Favorable 4 Reject Review 2 Success 750 Accept Failure - -150 1 Infavorable 5 Reject Success Accept Failure Do Not Review Reject (b) Assuming the manuscript review process is free, using the expected value approach, determine the optimal decision strategy. O Always reject O Always accept. O Review, and then always accept. O Do not review, and accept. O Review, and then accept if favorable or reject if unfavorable.The following payoff table shows the profit for a decision problem with two states of nature and two decision alternatives. State of Nature Decision Alternative 51 52 d1 12 3 d2 6 5 (a) Use graphical sensitivity analysis to determine the range of probabilities of state of nature s, for which each of the decision alternatives has the largest expected value. 7 v is optimal for p(s, ) s ; 2 v is optimal for p(s,) 2 (b) Suppose P(s, ) = 0.2 and P(s,) = 0.8. What is the best decision using the expected value approach? The best decision is [? v with an expected value of (c) Perform sensitivity analysis on the payoffs for decision alternative d . Assume the probabilities are as given in part (b), and find the range of payoffs under states of nature s, and s, that will keep the solution found in part (b) optimal. As long as the payoff for s, is (? v , then d, will be optimal. As long as the payoff for s, is [? v , then d, will be optimal. Is the solution more sensitive to the payoff under state of nature s, or s2? OS 12. [-/1 Points] DETAILS ASWQUANT13 4.E.016. MY NOTES PRACTICE ANOTHER A development corporation purchased land that will be the site of a new luxury condominium complex. Management is considering a six month market research study designed to learn more about potential market acceptance of the condominium project. Management anticipates that, if conducted, the market research study will provide one of the following two results. 1. Favorable report (F): A significant number of the individuals contacted express interest in purchasing a condominium. 2. Unfavorable report (U): Very few of the individuals contacted express interest in purchasing a condominium. After deciding whether to conduct the market research study, they have the following two decision alternatives. 1 = a small complex with 30 condominiums do = a medium complex with 60 condominiums Following this, a chance event concerning the demand for the condominiums has two states of nature. 1 = strong demand for the condominiums ", = weak demand for the condominiums The payoff table showing profit is as follows. Decision States of Nature Alternative 1 300 900 1200 600 (a) Show the decision tree. Decision Tree Description $ 1 d2 Market Research d1 d2 5 2 1 No Market Research (b) Use the following probabilities.The payoff table showing profit is as follows. States of Nature Decision Alternative 5 1 1 300 900 d 1200 600 (a) Show the decision tree. Decision Tree Description . A decision tree begins at decision node 1, and an upper and lower branch extend from this node to the right. The upper branch, labeled "Market Research," stops at chance node 2. The lower branch, labeled "No Market Research," stops at decision node 5. From node 2, an upper and lower branch extend to the right. The upper branch, labeled F, stops at chance node 3. The lower branch, labeled U, stops at chance node 4. From node 3, an upper and lower branch extend to the right. The upper branch, labeled d, stops at chance node 6. The lower branch, labeled dy, stops at chance node 7. From node 4, an upper and lower branch extend to the right. The upper branch, labeled d,, stops at chance node 8. The lower branch, labeled d2, stops at chance node 9. From node 5, an upper and lower branch extend to the right. The upper branch, labeled d,, stops at chance node 10. The lower branch, labeled d2, stops at chance node 11. From node 6, an upper and lower branch extend to the right. The upper branch, labeled s,, stops at an answer blank. The lower branch, labeled $2, stops at an answer blank. From node 7, an upper and lower branch extend to the right. The upper branch, labeled s,, stops at an answer blank. The lower branch, labeled $2, stops at an answer blank. From node 8, an upper and lower branch extend to the right. The upper branch, labeled s,, stops at an answer blank. The lower branch, labeled $2, stops at an answer blank. . From node 9, an upper and lower branch extend to the right. The upper branch, labeled s, , stops at an answer blank. The lower branch, labeled s,, stops at an answer blank. From node 10, an upper and lower branch extend to the right. The upper branch, labeled s,, stops at an answer blank. The lower branch, labeled $2, stops at an answer blank. . From node 11, an upper and lower branch extend to the right. The upper branch, labeled s,, stops at an answer blank. The lower branch, labeled $2, stops at an answer blank. (b) Use the following probabilities. P(F) = 0.58 P(U) = 0.42 P(s, IF) = 0.59 P(s, IF) = 0.41 P(s, IV) = 0.16 P(s, IU) = 0.84 P(s, ) = 0.41 P(s2) = 0.59 What is the optimal decision strategy? Conduct the market research. If it is favorable, choose decision d, . If it is unfavorable, choose decision d2- O Conduct the market research. If it is favorable, choose decision d2. If it is unfavorable, choose decision dj- O Don't conduct the market research. Choose decision dj Don't conduct the market research. Choose decision d.A manufacturing company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars). State of Nature Decision Low Medium High Alternative Demand Demand Demand Manufacture, d, 55 115 Purchase, d- 25 60 85 The state-of-nature probabilities are P(s, ) = 0.35, P(s,) = 0.35, and P(S;) = 0.30. (a) Use a decision tree to recommend a decision. The best decision is to |--Select-- the component part. (b) Use EVPI to determine whether the company should attempt to obtain a better estimate of demand, assuming the estimate would come at no further cost. EVPI = The EVPI suggests that the company -Select---| consider an attempt to obtain a better estimate of demand. (c) A test market study of the potential demand for the product is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows: P(F|s, ) = 0.10 P(F|s,) = 0.40 P(F|s,) = 0.60 P(U|s, ) = 0.90 P(U|s,) = 0.60 P(U|s,) = 0.40 What is the probability that the market research report will be favorable? P(F) = (d) What is the company's optimal decision strategy? O If F, then d . If U, then d2. O If F, then d2. If U, then d2. O If F, then d2. If U, then d1. O If F, then dj . If U, then dj. (e) What is the expected value (in thousands of dollars) of the market research information? EVSI = thousand dollars (f) What is the efficiency (as a %) of the information? (Round your answer to one decimal place.) Efficiency =