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Decision Analysis

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Use the data in the following payoff matrix and regret matrix to answer the following questions:

Payoff Matrix

Airport is Built at Location
Land Purchased at Location(s) A B
A $75.0 $15.0
B ($25.0) $125.0
A&B $52.0 $66.0
None $0.0 $0.0

Regret Matrix

Airport is Built at Location
Land Purchased at Location(s) A B
A $0.0 $110.0
B $100.0 $0.0
A&B $23.0 $59.0
None $75.0 $125.0

17. What is the optimal decision regarding at which location(s) to purchase property using the MAXIMAX decision rule?

18. What is the optimal decision regarding at which location(s) to purchase property using the MAXIMIN decision rule?

19. What is the optimal decision regarding at which location(s) to purchase property using the Criterion of Realism decision rule, assuming that the coefficient of realism is 0.55?

20. What is the optimal decision regarding at which location(s) to purchase property using the Equally Likely decision rule?

21. What is the optimal decision regarding at which location(s) to purchase property using the MINIMAX Regret decision rule?

22. What is the optimal decision regarding at which location(s) to purchase property using the Expected Monetary Value decision rule, assuming the probability of the airport being built at location A is 0.55?

23. What is the optimal decision regarding at which location(s) to purchase property using the Expected Opportunity Loss decision rule, assuming the probability of the airport being built at location A is 0.55?

A consulting firm has contacted your company claiming that their analysis conclusively indicates that the probability the airport will be built at location A is 0.55 (i.e., they have perfect information regarding the probability of the airport being built at location A). The consultant has offered to share their analysis with your company for a fee of $25.0 million.

24. What is the Expected Value of Perfect Information in this scenario?

25. Should your company accept the consultant's offer?

Develop a sensitivity analysis matrix that summarizes the expected monetary value for each possible alternative relative to the probability of location A being selected. Vary the probability of location A being selected from 0.0 to 1.0 in increments of 0.01. Plot the expected monetary value for each possible alternative versus the probability of location A being selected.

26. For what range of probability of the airport being built at location A is purchasing property at location A the optimal decision?

27. For what range of probability of the airport being built at location A is purchasing property at location B the optimal decision?

28. For what range of probability of the airport being built at location A is purchasing property at both locations A and B the optimal decision?

29. For what range of probability of the airport being built at location A is purchasing property at neither location A nor location B the optimal decision?

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Solution Summary

The solution is comprised of a detailed explanation of the various aspects of Decision Analysis. This step-by-step calculation and explanation of these complicated topics provides students with a clear perspective of Maximax Criterion, Maximin Criterion, Equal Likelihood Criterion, Minimax Regret Criterion, Expected Value Criterion, Expected Value, Expected Opportunity Loss, Sensitivity Analysis, etc.

Solution provided by:
Anwesha Ghosh, MSc
Education
  • MSc, Osmania University
  • MSc, Indian Institute of Technology - Roorkee (I.I.T.-ROORKEE)
  • BSc, Banaras Hindu University
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