Decision analysis

Problem 1: Payoffs/Decision Table (13 points) A small building contractor has recently experienced two successive years in which work opportunities exceeded the firm’s capacity. The contractor must now make a decision on capacity for next year. Estimated profits (in $ thousands) under each of the two possible states of nature are as shown in the table below. NEXT YEAR’S DEMAND Alternative Low High Do nothing Expand Subcontract $50** 20 40 $60 80 70 ** Profit in $ thousands. Which alternative should be selected if the decision criterion is: a. The optimistic approach? (3 points) b. The conservative approach? (3 points) c. Minimize the regret? (7 points) Problem 2: Payoffs/Decision Table (15 points) Dorothy Stanyard has three major routes to take to work. She can take Tennessee Street the entire way, she can take several back streets to work, or she can use the expressway. The traffic patterns are, however, very complex. Under good conditions, Tennessee Street is the fastest route. When Tennessee is congested, one of the other routes is preferable. Over the past two months, Dorothy has tried each of route several times under different traffic conditions. This information is summarized in minutes of travel time to work in the following table: ADM2302 M, N, P and Q Assignment # 4 Winter 2020 Page 2 No Traffic Congestion (Minutes) Mild Traffic Congestion (Minutes) Severe Traffic Congestion (Minutes) Tennessee Street Back roads Expressway 15 20 30 30 25 30 45 35 30 In the past 60 days, Dorothy encountered severe traffic congestion 10 days and mild traffic congestion 20 days. Assume that the past 60 days are typical of traffic conditions. a. What route should Dorothy take. Use the EP criterion. (10 points) b. Dorothy is about to buy a radio for her car that would tell her the exact traffic conditions before she started to work each morning. How much time in minutes on the average would Dorothy save by buying the radio? (i.e. Calculate the EVPI) (5 points).