Question: The following payoff table shows the profit for a decision problem with two states of nature and two decision alternatives: a. Use graphical sensitivity analysis

The following payoff table shows the profit for a decision problem with two states of nature and two decision alternatives:

a. Use graphical sensitivity analysis to determine the range of probabilities of state of nature s1 for which each of the decision alternatives has the largest expected value.
b. Suppose P(s1) = 0.2 and P(s2) = 0.8. What is the best decision using the expected value approach?
c. Perform sensitivity analysis on the payoffs for decision alternative d1. Assume the probabilities are as given in part (b) and find the range of payoffs under states of nature s1 and s2 that will keep the solution found in part (b) optimal. Is the solution more sensitive to the payoff under state of nature s1 ors2?

State of Nature Decision Alternative 10 4 d2

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a EVd 1 p10 1 p 1 9p 1 EVd 2 p4 1 p 3 1p 3 9p 1 1p 3 and hence p ... View full answer

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