Decision Analysis Problem: The CEO of an electric vehicle company is experiencin

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Decision Analysis Problem:

The CEO of an electric vehicle company is experiencing a substantial backlog, and is considering three courses of action in order to keep up with demand. Option 1 is to arrange for subcontracting, Option 2 is to construct new facilities, and Option 3 is to do nothing and continue with its current business’s operations model. The correct choice depends largely upon demand, which may be low, medium, or high. By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4. Management estimates the profits when choosing from the three alternatives. These profits in millions of dollars are presented in the table below. The information gathered is summarized in the following table:

Alternatives

Low Demand

Medium Demand

High Demand

Subcontracting

$10

$50

$90

Construct new facilities

-$120

$25

$200

Do nothing

$20

$40

$60

Demand Probabilities

0.1

0.5

0.4

What would the CEO’s decision be based on:

Maximax Criterion? (2 pts)

Maximin Criterion? (2 pts)

Maximum Likelihood? (2 pts)

Expected Payoff (Baye’s Decision Rule)? (2 pts)

Build a Decision Tree and determine the best alternative or strategy based on Expected Payoff [Baye’s Rule]. (2 pts)

Please use the tables below for your answers.

Decision Analysis Problem: (10 pts total)

What would the CEO’s decision be based on:

Maximax Criterion? (2 pts)

Alternatives

Maximax Criterion

Subcontracting

Construct New Facility

Do nothing

Using Maximax Criterion, the CEO should _____________________________________.

Maximin Criterion? (2 pts)

Alternatives

Maximin Criterion

Subcontracting

Construct New Facility

Do nothing

Using Maximin Criterion, the CEO should _____________________________________.

Maximum Likelihood? (2 pts)

Using Maximum Likelihood Criterion, the CEO should ________________________________.

Expected Payoff (Baye’s Decision Rule)? (2 pts) [Demonstrate how you calculated the expected payoff. Space to show your work is given in the table.]

Alternatives

Expected Payoff

Subcontracting

=__________

Construct New Facility

=__________

Do nothing

=__________

Using Baye’s Rule, the CEO should _____________________________________.

Build/draw a Decision Tree using the proper notation and determine the best alternative or strategy based on Expected Payoff [Baye’s Rule]. (2 pts)

Alternatives

Low Demand

Medium Demand

High Demand

Subcontracting

$10

$50

$90

Construct new facilities

-$120

$25

$200

Do nothing

$20

$40

$60

Demand Probabilities

0.1

0.5

0.4

Explanation / Answer

Solution-

Since chegg's policy entitles me to solve first 4 subparts of a question in case 5 or more subparts are posted, I am solving first 4 parts only.

Alternatives

Low Demand

Medium Demand

High Demand

Subcontracting

$10

$50

$90

Construct new facilities

-$120

$25

$200

Do nothing

$20

$40

$60

Demand Probabilities

0.1

0.5

0.4

From the above table, the alternatives given in the left side are known as Decision Alternatives, while levels such as Low demand, medium demand and high demand given on the top are known as "States of Nature". The numbers given in the middle are known as Payoffs.

A. Maximax Criterion- Maximises the maximum Payoff (Best of Best)- it choses the maximum of best options of each alternatives.

Using Maximax Criterion, the CEO should chose "Construct new facilities" alternative.

B. Maximin Criterion- Maximises the minimum option of each alternative. Using this option we will consider the maximum option of each alternative minimum.

Using Maximin Criterion, the CEO should choose "Do Nothing" alternative.

c. Maximum Likelihood Criterion- Under this criterion, we consider the payoffs for only the highest probability "States of Nature".

Using Maximum Likelihood Criterion, the CEO should subcontracting.

D. Expected payoff = Probability 1* payoff 1 + probability 2 * payoff 2 + .........+ probability N * payoff N

Epected payoff for subcontracting = 0.1*10 + 0.5*50 + 0.4*90 = 62

Epected payoff for construct new facility = 0.1*(-120) + 0.5*25 + 0.4*200 = 80.5

Epected payoff for Do Nothing = 0.1*20 + 0.5*40 + 0.4*60 = 46

Therefore, expected payoff for the project would be maximum of all course of action = 80.5

Alternatives

Low Demand

Medium Demand

High Demand

Subcontracting

$10

$50

$90

Construct new facilities

-$120

$25

$200

Do nothing

$20

$40

$60

Demand Probabilities

0.1

0.5

0.4

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