Decision under uncertainty Zed and Adrian and run a small bicycle shop called"Z to A Bicycles"....

Decision under uncertainty

Zed and Adrian and run a small bicycle shop called"Z to A Bicycles". They must order bicycles for the coming month. Orders for the bicycles must be placed in quantities of twenty (20). If Zed and Adrian run out of bicycles during the month, then they will suffer a loss of "goodwill" among their customers. Zed and Adrian estimate that the demand for bicycles this month will be 10, 30, 50, or 70 bicycles but the probabilities for these possibilities are unknown. The table below depicts the profit that results from each possibility.

		State of nature
		Demand 10	Demand 20	Demand 50	Demand 70
Strategy	Order 20	$50	$550	$450	$350
	Order 40	-$330	$770	$1270	$1170
	Order 60	-$650	$450	$1550	$2050
	Order 80	-$970	$130	$1230	$2330

a.) Determine the best strategy using the maximin criterion. Show work that supports your answer.

b.) Determine the best strategy using the maximax criterion. Show work that sup- ports your answer.

c.) Determine the best strategy using the minimax regret criterion. Show work that supports your answer.

d.) Represent the payoff table in decision tree form.

Solutions

Expert Solution

orchestra answered 1 year ago

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