DECISION THEORY

SOME PROBLEMS
1. IF SMALL FACILITY IS BUILT AND DEMAND IS LOW, THE NET PRESENT VALUE WILL
BE $400,000. IF THE DEMAND IS HIGH, THE FIRM CAN EITHER MAINTAIN SMALL
FACILITY OR EXPAND IT. NPV OF EXPANSION WOULD BE $450,000 AND
MAINTENANCE WOULD BE $50,000. IF A LARGE FACILITY IS BUILT AND DEMAND IS
HIGH, THE ESTIMATED NPV IS $800,000. IF DEMAND TURNS TO BE LOW, THE NPV
WILL BE - $10,000. THE PROBABILITY OF HIGH DEMAND IS 60%.
2.
FIND DECISION USING FOUR APPROACHES OF DECISION MAKING UNDER
UNCERTAINTY
A)
Possible Future Sale
Facility

Low

Medium

High

Small

10

10

10

Medium

12

12

Large

(4)

16

B)
Possible Future Demand
Facility

Low

Medium

High

Small

15

18

20

Medium

10

13

Large

10

12

21

3. COMPANY X IS BUILDING A NEW FACILITY. IF THEY BUILD SMALL AND DEMAND IS

LOW , PAYOFF IS 40. IF THE DEMAND IS HIGH THEY CAN DO NOTHING WITH PAYOFF
40, CAN DO OVERTIME WITH PAYOFF 50 OR CAN EXPAND WITH PAYOFF 55. IF THEY

BUILD LARGE AND DEMAND IS LOW THEY CAN DO NOTHING WITH PAYOFF (10) OR
CAN REDUCE PRICE WITH PAYOFF 50. IF THE DEMAND IS HIGH THE PAYOFF IS 70.
ALL THE VALUES ARE IN MILLION DOLLAR. THE PROPABILITY OF LOW DEAMND IS
40%. DRAW A DECISION TREE AND FIND THE DECISION.
4. COMPANY Y IS DECEDING ON NEW PRODUCT. IF THEY DEVELOP PRODUCT A AND
DEMAND IS LOW , THEY CAN DO NOTHING WITH PAYOFF 30 OR CAN IMPROVE THE
PRODUCT WITH PAYOFF WITH 40. IF THE DEMAND IS HIGH THEY CAN DO NOTHING
WITH PAYOFF 50 OR CAN INCREASE PRICE WITH PAYOFF 60. IF THEY CHOOSE
PRODUCT B AND DEMAND IS LOW THEY CAN PROMOTE WITH PAYOFF 50 OR CAN
REDUCE PRICE WITH PAYOFF 40 OR CAN DO NOTHING WITH PAYOFF 30. IF THE
DEMAND IS HIGH, THEY CAN EXPAND WITH PAYOFF 50 OR THEY CAN OVERTIME
WITH 45. ALL THE VALUES ARE IN MILLION DOLLAR. THE PROPABILITY OF LOW
DEAMND IS 70%. DRAW A DECISION TREE AND FIND THE DECISION.
5. COMPANY Z IS DECEDING ON NEW PRODUCT. THEY CAN DEVELOP NEW PRODUCT
EITHER THOROUGH OR RAPID DEVELOPMENT. IF DEVELOPMENT IS THOROUGH AND
MARKET REACTION IS GOOD, THE PAYOFF IS 1000. FOR MODERATE REACTION,
PAYOFF 50 AND FOR POOR, PAYOFF 2. FOR RAPID, GOODS PAYOFF 800,
MODERATES PAYOFF 60 AND POORS PAYOFF 3. ON THE OTHERHAND, IF THEY
CONSOLIDATE ISO NEW PRODUCT DEVELOPMENT, THEY CAN STRENGTHEN
PRODUCTS OR REAP PRODUCTS. FOR STRENGTHEN, GOODS PAYOFF 900,
MODERATES PAYOFF 20 AND POORS PAYOFF 6. FOR REAP, GOODS PAYOFF 950,
MODERATES PAYOFF 25 AND POORS PAYOFF 1.ALL THE VALUES ARE IN THOUSAND
DOLLAR. THE PROPABILITY OF LOW DEAMND IS 20% AND MEDIUM DEMAND IS 40%.
DRAW A DECISION TREE AND FIND THE DECISION.
6.
A THEME PARK HAS FINISHED THEIR LEASE OF 10 YEARS. NOW THE
MANAGEMENT IS DECIDING ON WHETHER THEY WILL TAKE THE LEASE AGAIN.
AGAIN, TOWN PLANNING BOARG IS DECIDING ABOUT A MOTEL. BASED ON THIS
DECISION, THE MANAGEMENT CAN ALSO RELOCATE THE THEME PARK NEAR THE
MOTEL. THE PROBABILITY OF MOTL APPROVAL IS 35%. THE PAYOFF TABLE IS GIVEN
BELOW.
MOTEL APPROVED
RENEW LEASE
$500000
RELOCATE
5000000
A) FIND EMV FOR ALL ALTERNATIVES

MOTEL REJECTED
4000000
100000

B) DRAW DECISIONTREE AND TAKE THE DECISION

C) IF A TEMPORARY LEASE CAN BE TAKENFOR $1200000, WHAT WILL BE YOUR
DECISION? USE DECISION TREE.

7. A FIRM THAT ASSEMBLES COMPUTERS IS ABOUT TO START PRODUCTION OF TWO

NEW TYPES OF MICRO COMPUTERS. THE ADDITIONAL INFORMATION AS FOLLOWS
TYPE X1
PROFIT PER UNIT

$60

TYPE X2

AVAILABLE

$50

ASSEMBLY TIME PER UNIT 4 HRS

10 HRS

INSPECTION TIME PER UNIT

2 HRS

1 HR

STORAGE SPACE PER UNIT

3 CUBIC FEET

100 HRS
22 HRS
3 CUBIC FEET

39 CUBIC FT

USE LINEAR PROGRAMMING FOR OPTIMIZE YOUR DECISION.

8. THE LOCAL GROCERY STORE SELLS APPLE PIE FOR $1.50 AND GRAPE PIES FOR
$1.20. DUE TO VERY GOOD QUALITY, IT CAN SELL ALL THE PIES. FOR THE MONTH
OF FEBRUARY, IT HAS 1200 CUPS OF SUGAR AND 2100 CUPS OF FLOUR. EACH
APPLE PIE NEEDS 1.5 CUP OF SUGAR AND 3 CUPS OF FLOUR. EACH GRAPE PIE
NEEDS 2 CUPS OF SUGAR AND 3 CUPS OF FLOUR. AN APPLE PIE NEEDS SIX MINUTES
AND GRAPE PIE NEEDS THREE MINUTES TO BE MADE. THE TIME AVAILABLE IS 60
HOURS. FIND OPTIMAL VALUES FOR DECISION VARIABLES FOR MAXIMIZATION
9. AN ELECTRONIC COMPANY HAS TWO MICROWAVE MODELS H AND W.
FABRICATION AND ASSEMBLY ARE NEEDED. FOR H, FABRICATION TIME IS 4 HOUR
AND ASSEMBLY TIME IS 2 HR. FOR W, FABRICATION TIME IS 2 HOUR AND ASSEMBLY
TIME IS 6 HR.TOTAL FABRICATION TIME AVAILABLE IS 600 HR AND ASSEMBLY TOTAL
HR IS 480. PROFIT FOR H IS $40 AND FOR W IS $30. FIND OPTIMAL VALUES FOR
DECISION VARIABLES FOR MAXIMIZATION
10. MINIMIZE COST, Z= 2X+ 3Y
SUBJECT TO:
POTASSIUM:

4X+2Y20

CARBOHIDRATE:

2X+6Y18

PROTEIN:

X+2Y12
X,Y0
PREPARED BY
NAZMUN NAHAR
FACULTY, OM, FBA, AIUB