Question

Based on the structured way you think about project design in your company, you’ve been made the team lead of a project. If you execute it successfully, you’ll reap the rewards.

You’ve convened a team representing different functional groups in your company and the team has come up with several design alternatives (named A-C), which you’ve describe to your manager.

You’re working hard one day when your manager rushes into your office and say...:

Your manager: “OK, I just had a meeting with Marketing. They say that if we produce design A, we’ll have net profits of $1M if we’re successful, but lose $0.5M if we aren’t. And there’s a 50% chance we’ll be successful. If we produce design B, we’ll have net profits of $5M if we’re successful, but lose $1M if we aren’t. And there’s a 25% chance we’ll be successful on that design. With design C, we’ll have net profits of $0.25M if we’re successful, and come out even (lose $0) if we aren’t. And there’s a 75% chance we’ll be successful on that last design. What do you think?”

You: “Well, there are a few ways we can look at this...”

Perform the following decision analyses:

(a) Which design would you choose using the maximin and maximax rules?

(b) Graph the Hurwicz rule versus α. Can you eliminate any choices? Which one would you choose for α = 0.1? Which one would you choose for α = 0.7?

(c) Which design would you choose using expected value?

Answer 1

Answer:

Based on the structured way you think about project design in your company, you’ve been made the team lead of a project.