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Decision Analysis

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Miramar Co. is going to introduce one of three new products: a widget, a hummer, or a nimnot. The market conditions (favorable, stable, or unfavorable) will determine the profit or loss the company realizes as shown in the following payoff table:

Product favorable (0.2) Stable (0.7) Unfavorable (0.1)
Widget 120,000 70,000 -30,000
Hummer 60,000 40,000 20,000
Nimnot 35,000 30,000 30,000

A. Compute the expected value for each decision and select the best one.
B. Develop the opportunitiy loss table and compute the expected opportunity loss for each product.
C. Determine how much the firm would be willing to pay to a market research firm to gain better information about future market conditions.

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Solution Summary

This 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 Expected Value, Expected Oppertunity Loss 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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