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Tutorial 3

The document outlines a decision analysis problem involving two alternatives and three states of nature, requiring the construction of a decision tree. It provides probability assessments and uses the expected value approach to determine the optimal decision, which is identified as d1 with an expected value of 182.5. Additionally, it discusses the optimal decision strategy with perfect information, its expected value, and the expected value of perfect information, calculated to be 10.

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3 views2 pages

Tutorial 3

The document outlines a decision analysis problem involving two alternatives and three states of nature, requiring the construction of a decision tree. It provides probability assessments and uses the expected value approach to determine the optimal decision, which is identified as d1 with an expected value of 182.5. Additionally, it discusses the optimal decision strategy with perfect information, its expected value, and the expected value of perfect information, calculated to be 10.

Uploaded by

su juih ho
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Tutorial 3

1. The following payoff table shows profit for a decision analysis problem with two decision
alternatives and three states of nature.

Table T3-1

Construct a decision tree for this problem.

2. By referring the Table T3-1. Suppose that the decision maker obtained the probability
assessments P(s1) = 0.65, P(s2) = 0.15, and P(s3) = 0.20. Use the expected value approach to
determine the optimal decision.

3. By referring the Table T3-1, the probabilities for the states of nature are P(s1) = 0.65, P(s2) =
0.15, and P(s3) = 0.20.

a. What is the optimal decision strategy if perfect information were available?


b. What is the expected value for the decision strategy developed in part (a)?
c. Using the expected value approach, what is the recommended decision without perfect
information? What is its expected value?
d. What is the expected value of perfect information?
Suggested Answers to Tutorial

1.

2.
EV(d1) = 0.65(250) + 0.15(100) + 0.20(25) = 182.5
EV(d2) = 0.65(100) + 0.15(100) + 0.20(75) = 95
The optimal decision is d1.

3.
a. If s1, then d1; if s2, then d1 or d2; if s3, then d2.
b. EVwPI = 0.65(250) + 0.15(100) + 0.20(75) = 192.5
c. From the solution to Question 2, we know that EV(d1) = 182.5 and EV(d2) = 95; thus,
recommended decision is d1; hence, EVwoPI = 182.5.
d. EVPI = EVwPI - EVwoPI = 192.5 - 182.5 = 10

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