Question 1

(a)

Under the maximax criterion the firm should build factory X as its
alternative.
Factor X = 120
Factor Y = 70
Plant Z = 80

(b) Under the maximin criterion the firm should build factory Y as its option
Factor X = 30
Factor Y = 40
Plant Z = 10

(c) Under the LaPlace criterion the firm should Build Factory X as its option
(Average)
Factory X: 10 + 30 + 50 + 120 4 = 52.5
Factory Y: 40 + 50 + 60 + 70 4 = 55
Plant Z: 10 + 40 + 80 + 10 4 = 35

(d) The firm should build factory Y with the Hurwicz criterion as its option
= 0.2
1 = 0.8
Factory X : 0.2 (120) + 0.8 (10) = 24 + 8 =32
Factory Y : 0.2 (70) + 0.8 (40) = 14 + 32 =46
Plant Z : 0.2 (80) + 0.8 (10) = 16 + 8 = 24

(e) Using the minimax regret approach the firm should build factory X
Table of regrets

Decision
Alternativ
es

Maximax

Factor X

40 10 =
30

50 30 = 20

80 50 = 30

120 120
=0

30

Factor Y

40 40 = 0

50 50 = 0

80 60 = 20

120 70 =
50

50

Plant Z

40 10 =
30

50 40 = 10

80 80 = 0

120 10 =
110

110

Factory X = 30
Factory Y = 50
Plant Z = 110

(f) Factory X: 0.2(10) + 0.3(30) + 0.4(50) + 0.1(120) = 43

Factory Y: 0.2 (40) + 0.3(50) + 0.4(60) + 0.1(70) = 54
Plant Z: 0.2 (10) + 0.3(40) + 0.4(80) + 0.1(10) = 47

Therefore: E.V. = 54
So the option that should be chosen is to build factory Y.

(g) EVPI - Method 1: Apply probability to the regret table

Factory X: 0.2(30) + 0.3(20) + 0.4(30) + 0.1(0) = 24
Factory Y: 0.2(0) + 0.3(0) + 0.4(20) + 0.1(50) = 13
Plant Z : 0.2(30) + 0.3(10) + 0.4(0) + 0.1(110) = 20
EVPI = 13

Alternative Method
(h) EVPI = EWPI EWOPI
54
EWPI = 0.2(40) + 0.3(50) + 0.4(80) + 0.1(120) = 67
Therefore EWPI - EWOPI
67
- 54 = 13

Part B
States of nature Amount of inflation
Payoffs as profits
Decision

A= 2%

B= 5%

C= 10%

D=15%

Build factory
X

-10

-30

-5

-120

Build Factory
Y

-40

-5

-6

-70

Lease Plant Z

-10

-40

-10

-10

(a) Under the maximax criterion the firm should Build Factory X or Lease Plant Z

Factory X = -10
Factory Y = -40

Plant Z

= -10

(b) Under the maximin criterion the firm should Lease plant Z

Factory X = -120
Factory Y = - 70
Plant Z

= -40

(c) Under the LaPlace criterion the firm should Lease Plant Z

X = -10 -30 -50 -120 = -210 = -52.5

4
4
Y = -40 -50 -60 -70 = -220 = -55
4
4
Z = -10 -40 -80 -10 = -140 = -35
4
4
(d) With the Hurwicz criterion the firm should build factory Y (with =0.2)
= 0.2
1 = 0.8
X : 0.2 (-10) + 0.8 (-120) = -98
Y : 0.2 (-40) + 0.8 (-70) = -64
Z : 0.2 (-10) + 0.8 (-80) + -66

(e) Using the minimax regret approach, the firm should choose to Lease Plant Z.

(f) Factory X 0.2(-10) + 0.3(-30) + 0.4(-50) + 0.1(-120) = -43

Factory Y 0.2(-40) + 0.3(-50) + 0.4(-60) + 0.1(-70) = -54
Plant Z

0.2(-10) + 0.3(-40) + 0.4(-80) + 0.1(-10) = -47

Therefore, E.V. = -43

Decision: Build Factory X to minimize expected cost
A
B
C
D

Max

110

110

30

20

10

60

60

10

30

30

(g) E.V.P.I
Factory X: 0.2 (-0) + 0.3(-0) + 0.4(-0) + 0.1(-110) = -1
Factory Y: 0.2(-30) + 0.3(-20) + 0.4(-10) + 0.1(-60) =-22
Plant Z:

0.2(-0) + 0.3(-10) + 0.4(-30) + 0.1(-0) = -15

EVPI = -22

(h) EVPI = EWPI EWOPI

-22

-42

-64

Question #2

(A) Please see the attached decision tree

Using the law of total probability

P(N) =
P(N/D) P(D) + P(N/G) P(G) + P(N/B) P(B)
(0.7) (0.3) + (0.3) (0.3) + (0.1) (0.4)
= 0.21 + 0.09 + 0.04
= 0.34

P(O) =
P(O/P) P(D) + P(O/G) + P(G) + P(O/B) P(B)
= (0.2) (0.3) + (0.3) (0.3) + (0.4) (0.4)
= 0.06 + 0.09 + 0.16
= 0.31

P(C) =
P(C/D) P(D) + PC/G) P(G) + P(C/B) P(B)
= (0.1) (0.3) + (0.4) (0.3) + (0.5) (0.4)
= 0.03 + 0.12 + 0.2
= 0.35

Using Bayes Theorum

P (D/N) = P(N/D) P(D)
P(N)
= (0.7) (0.3)
0.34
= 0.62

P (G/N) = P(N/G) P(G)

P(N)
= (0.3) (0.3)
0.34
= 0.26

P (B/N) = P(N/B) P(B)

P(N)
= (0.1) (0.4)
0.34
= 0.12

P (D/O) = P(O/D) P(D)

P(O)
= (0.2) (0.3)
0.31
= 0.19

P (G/O) = P(O/G) P(G)

P(O)
= (0.3) (0.3)
0.31
= 0.29

P (B/O) = P(O/B) P(B)

P(O)
= (0.4) (0.4)
0.31
= 0.52

P (D/C) = P(C/D) P(D)

P(C)
= (0.1) (0.3)

0.35
= 0.09

P (G/C) = P(C/G) P(G)

P(C)
= (0.4) (0.3)
0.35
= 0.34

P (B/C) = P(C/B) P(B)

P(C)
= (0.5) (0.4)
0.35
= 0.57

Decision: Do seismic test.

Seismic Results: If theres no structure the company should sell.
If theres a close structure the company should drill.
If theres an open structure the company should drill.
Final expected profit: (38) (0.34) + (76.65) (0.31) + (90.9) (0.35) = 68.5
(c) EVSI = EWSI EWOSI
3 = 68.5 65.5

(d) EVPI = EWPI EWOPI

0 = 65.5 65.5

EWPI = (-40 x 0.3) + (45 x 0.3) + (160 x 0.4) = 65.5

(e) Efficiency = EVSI x 100 = 0 / 3 x 100 = 300 %

EVPI

Question 3
(A)

WEE
K

SAL
ES

FORECA
ST

ERR
OR

ABS
ERROR

SQUAR
ED
ERROR

17

21

19

23

19.33

3.67

3.67

13.47

18

21.33

3.33

11.09

16

19.83

(3.33
)

3.83

14.67

20

17.83

(3.83
)

2.17

4.71

18

18.33

2.17

0.33

0.11

22

18.33

(0.33
)

3.67

13.47

ABS
%
ERROR

15.96
%
18.5%
23.94
%
10.85
%

10

20

20.33

3.67

0.33

0.11

1.83%

11

15

20.33

5.33

28.41

12

22

17.83

(0.33
)

4.17

17.39

16.68
%

(5.33
)

1.65%
35.53
%

4.17

18.96
%

MAD = AVG OF ABS ERROR = 2.98

MSE = AVG OF SQUARE ERROR = 11.49
MAPE = AVG OF ABS % ERROR = 15.9

(B)

Week

Sales

Forecast

Error

Absolute
Errors

Squared
Errors

Abs Errors
%

1
2

15
21

#N/A
15

0
6

36

15.6

3.4

3.4

11.56

23

15.94

7.06

7.06

49.8436

18

16.646

1.354

1.354

1.833316

6
7

16
20

-0.7814
3.29674

0.7814
3.29674

18

16.7814
16.7032
6
17.0329
3

0.96706
6

0.967066

0.61058596
10.8684946
3
0.93521664
8

28.5714285
7
17.8947368
4
30.6956521
7
7.52222222
2
-4.88375
16.4837

19

5.37258888
9

22

10

20

11

15

12

22

17.1296
4
17.6166
8
17.8550
1
17.5695
1

4.87035
9
2.38332
3
2.85501
4.43049
2

4.8703594
2.38332346
2.855008886
4.430492003

3.399853614
MAD

MAD = AVG OF ABS ERROR = 3.40

MSE = AVG OF SQUARE ERROR = 15.35
MAPE = AVG OF ABS % ERROR = 12.44

(C)

Y sales
X weeks
x = 78
y = 231

23.7204006
9
5.68023071
5
8.15107573
9
19.6292593
9

22.1379972
7
11.9166173

15.3483799
8
MSE

12.4378546
1
MAPE

19.0333926
20.1386000
1

xy = 17+42+57+92+90+96+140+144+198+200+165+264 = 1505
x2 = 650

b = nxy - xy / nx2 (x)2 = 12(1505) (78)(231) / 12(650) (78)2

a = y/n b x/n = 19.25 0.024(6.5) = 19.09
Regression line:
y = 19.09 + 0.024x

= 0.024