The BigGreasy is an expensive oil newsletter to which many oil giants subscribe,
ID: 2819395 • Letter: T
Question
The BigGreasy is an expensive oil newsletter to which many oil giants subscribe, including James Slick. In the last issue, the letter described how the demand for oil products would be extremely high. Apparently, the American consumer will continue to use oil products even if the price of these products doubles. Indeed, one of the articles in the BigGreasy states that the best decision can often be determined by using the five criteria for making decisions under uncertain. Determine the best alternative for each of the 5 criteria.(You should have 5 results.) FavorableUnfavorable Market ($) Market ($) Equipment exaco$320,000 $43,000 BP 220,000 $36,500 Shell $175,000 $18,000 1. What decision model should James use? 2. What is the optimal decision? 3. How much should James be willing to pay for perfect information?Explanation / Answer
1. Since probabilities are not given, Decision making under uncertainty must be used
2.
Criteria 1: Maximin = BP ( choosing one with maximum min payoff)
Criteria 2: Maximax = Texaco ( choosing one with maximum Max payoff)
Criteria 3. Laplace criteria ( assign equal probability to each outcome and choose one with the highest outcome)
Texaco = 0.5*320000+0.5*-43000 = 138500
BP = 0.5*220000+0.5*36500 = 128250
Shell = 0.5*175000+0.5*18000 = 96500
Since texaco have the highest outcome, it must be chosen
Criteria 4: Hurwicz Criterion (Since probabilities are not given, so we assume equal probabilities and result would be the same as Laplace criteria)
Texaco must be chosen
Criteria 5: Regret/MiniMax (Chose a minimum of maximum) = Shell
He must be optimistic about the future as the demand is going to increase but be cautious as well and must use Laplace criteria to reach the final decision
The optimal decision would be to choose Texaco.
3. Expected Value with above model = 138500
Lets assume he is able to bank upon perfect information by having equal weight to a maximum of max payoff and min payoff
Expected value with perfect information = 0.5*320000+0.5*36500 = $ 178250
Willingness to pay for perfect information = 178250-138500 = 39750
Equipment Max Payoff Min Payoff Texaco $320,000 ($43,000) BP $220,000 $36,500 Shell $175,000 $18,000Related Questions
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