Question

Ron Miller, owner of Miller Marketing is considering three options for his new product development: continuing with its own staff, hiring an outside vendor to do the managing (outsourcing), or a combination of its own staff and outside vendor. The payoff table is as follows:

Decision Alternatives

                                          Good economy (S1)         Fair economy (S2)   Poor economy (S3)

In house, d1                         60,000                               60,000                         50,000

Outsourcing, d1                   80,000                               80,000                        30,000

Combination, d3                 100,000                              70,000                        10,000

If nothing is known about the demand probabilities

Using conservative approach, specify the best decision alternative

Using the Minimax regret approach create the opportunity Loss/regret table and

Specify the best decision alternative.

Suppose the probabilities for Good, Fair, and Poor Economy are 30%, and 40% respectively,

Construct a Decision Tree and solve it using expected value approach. What is the recommended decision alternative?

Calculate the expected value of the perfect information (EVPI)?

Answer 1