QUESTION 3

The Charm City Consultants Inc. wants to build a new network of computers for its employees. The management of the company is considering three network sizes for the possible purchase: large, medium, or small. The management believes that the demand for their services will be either high level, medium level, or low level. The payoff (profit in dollars) table for the situation is given below:

Demand Level

Decision High Medium Low

Large Size $150,000 $ 60,000 $20,000

Medium Size $100,000 $110,000 $50,000

Small Size $ 60,000 $ 70,000 $80,000

(a) What is the best decision using the maximax criterion? What is the payoff for it?

(b) What is the best decision using the maximin criterion? What is the payoff for it?

(c) What is the best decision using the minimax regret criterion? What is the payoff for it?

(d) What is the best decision using the Hurwiczs criterion if = 0.4? What is the payoff for it?

QUESTION #4

For the problem given in Question 3, assume that the probability of high demand level is 0.3, the probability of medium demand level is 0.4, and the probability of low demand level is 0.3. (a) Calculate the expected value of each decision alternative. What is your recommendation using the expected value criterion? (b) Calculate the expected opportunity loss value of each decision alternative. What is your recommendation using the expected opportunity loss criterion? (c) Calculate and interpret the value of perfect information.