Question

Today’s Electronics specializes in manufacturing modern electronic components. It also builds the equipment that produces the components. Phyllis Weinberger, who is responsible for advising the president of Today’s Electronics on electronic manufacturing equipment, has developed the following table concerning a proposed facility:

	PROFIT ($)
	STRONG MARKET	FAIR MARKET	POOR MARKET
Large facility	430,000	105,000	-160,000
Medium-sized facility	300,000	129,000	-100,000
Small facility	200,000	100,000	-32,000
No facility	0	0	0
Probabilities	0.15	0.55	0.30

a) What kind of decision-making environment is this? (5 pts)

b) What is the expected monetary value (EMV) decision? (10 pts)

c) Develop an opportunity loss table.

d) What is the expected opportunity loss (EOL) decision? (10 pts)

e) What is the expected value of perfect information (EVPI)? (10 pts)

Answer 1

Solution :

( a ).

• It is a decision making environment under Uncertainty.
• Here, different types of environments or conditions can take place such as Strong market, Fair market and Poor market.
• So, there are techniques such as Maximax, Maximin, Minimax Regret (opportunity loss) and Laplace equally Likely criteria to be used to solve the problems, faced in decision making process.

( b )

• .EMV of large facility = .15*430000 + .55*105000 + .30*(-160000) = $74250
• EMV of medium facility = .15*300000 + .55*129000 + .30*(-100000) = $85950
• EMV of small facility = .15*200000 + .55*100000 + .30*(-32000) = $75400
• EMV of no facility = 0

So, the Medium facility will be selected under the Expected monetary value (EMV) decision , as it has the highest EMV of profit.

( c )

Opportunity Loss Table	Maximum Regret
Alternative	Strong market	Fair Market	Poor market
Large Facility	0	24,000	1,60,000	1,60,000
Medium size facility	1,30,000	0	1,00,000	1,30,000
Small facility	2,30,000	29,000	32,000	2,30,000
No facility	4,30,000	1,29,000	0	4,30,000

( d )

• It is to select medium size facility as it gives minimum regret among all the alternatives

i.e $130000

• As shown in maximum regret column above.

( e )

• EMV without perfect information = $85950 ( from part b)
• EMV with perfect information = 0.15*430000 + 0.55*129000 + 0.3*0 = $1,35,450
• So,

EVPI = EMV with perfect information - EMV without perfect information

EVPI = 135450 - 85950

EVPI = $49500

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