Theory of decision

Phase 2. Solve problems by applying the algorithms of the unit 1

Prepared by:
Maria José rafael silgado
Code: 92694467
Group: 212066_26

Tutor name:
Paula Andrea Carvajal

Universidad nacional abierta y a distancia (UNAD)

Cead Valledupar
06-march-2019
ms of the unit 1

UNAD)
 Problem 1. DECISION TREES, EVPI and EVMI
Teratex, a textile company that has a productive experience in the foreign market
decide if it manufactures a new product in its main plant, or if on the contrary the p
external supplier. The profits depend on the demand of the product. The table s
profits, in millions of dollars.
Table 1. Decision process for the commercialization of th
product
States of nature
Decision alternative Demand low
Demand low-
average - utility
utility
Manufacture 235 273
Subcontract 213 229
Buy 223 235
Probabilities Ʃ = 1 0.28 0.32

Questions:
Solution:
a. Use EVPI to determine if the company should try to get a better estimate of the

Decision Trees
Probability

MANUFACTURE Low

Low average
NODE 2

High

Low
NODE 1
SUBCONTRACT Low average
NODE 3

High

Low
NODE 4
Low average
 BUY High

Expected value is obtained:

NODE 2 275.96 dollars

NODE 3 239.72 dollars
NODE 4 248.04 dollars

EMV= 275.96

The recommended decision is to manufacture waiting for a payment of

$ 275.96 millions

Knowing the direction

EVwPI= $ 275.96 millions

EVwoPI= $ 275.96 millions
EVPI= $ - millions

b. A test market study of potential product demand is expected to report a favorab

condition. The relevant conditional probabilities are:
P(s1)= 0.4
P(s2)= 0.28
P(F/low) = 0.25 P(s3)= 0.32
P(F/low average) = 0.31
P(F/high) = 0.5

FAVORABLE
Previous Conditional
States of nature probabilitie probabilities
s P (Sj) (F/sj)
LOW 0.28 0.25
LOW AVERAGE 0.32 0.31
HIGH 0.4 0.5
P(F)
 P(D/low)= 0.75
P(D/ low average)= 0.69
P(D/high)= 0.5

UNFAVORABLE
Previous Conditional
States of nature probabilitie probabilities
s P (Sj) (D/sj)
LOW 0.28 0.75
LOW AVERAGE 0.32 0.69
HIGH 0.4 0.5
P(D)

FAVORABLE 0.37
NODE 2

NODE 1
 UNFAVORABLE 0.63
NODE 3

c. What is the expected value of market research information?

To find the value of the sample information we have to: VEIM= ǀVEcIM-VEsIMǀ

VEcIM= $ 275.96 millions

VEsIM $ 275.96 millions
VEIM= 0.00

d. What is the efficiency of the information?

VEIM
E= *100
VEIP

$ - 0
E=
$ -

EFFICIENCY OF 0%
S, EVPI and EVMI
he foreign market of 25 years, must
n the contrary the purchase from an
oduct. The table shows projected

ercialization of the

of nature
Demand High -
utility EMV
307 275.96
267 239.72
276 248.04
0.4

ter estimate of the demand.

Demand
0.28 235 65.8

0.32 273 87.36

0.4 307 122.8

0.28 213 59.64

0.32 229 73.28

0.4 267 106.8

0.28 223 62.44

0.32 235 75.2

 0.4 276 110.4

millions

Knowing the direction the market will go (i.e. having perfect information) is worth $0.

o report a favorable (F) or unfavorable (U)

E
Joint Later
possibilities possibiliti
P(F n Sj) es P(sj/F)
0.07 0.19
0.10 0.27
0.20 0.54
0.37
LE
Joint Later
possibilities possibiliti
P(D n Sj) es P(sj/D)
0.21 0.33
0.22 0.35
0.20 0.32
0.63
LOW 0.19 235
MANUFACTURE
LOW AVERAGE 0.27 273
NODE 4
HIGH 0.54 307

LOW 0.19 213

SUBCONTRACT
LOW AVERAGE 0.27 229
NODE 5
HIGH 0.54 267

LOW 0.19 223

BUY LOW AVERAGE 0.27 235

NODE 6
HIGH 0.54 276

LOW 0.33 235

MANUFACTURE
LOW AVERAGE 0.35 273
NODE 7
HIGH 0.32 307
 LOW 0.33 213
SUBCONTRACT
LOW AVERAGE 0.35 229
NODE 8
HIGH 0.32 267

LOW 0.33 223

BUY LOW AVERAGE 0.35 235

NODE 9
HIGH 0.32 276

VEcIM-VEsIMǀ
rth $0.
284.213

284.213

246.551

254.935
275.960

271.129
 271.129

235.722

244.004
 Problem 2. DECISION TREES, EVPI and EVMI
ElectroCom, a company that manufactures electronic components for the introd
product catalog, must decide whether to manufacture a new product in its ma
subcontract it with company supervision or if it buys it from an external supplier.
depend on the demand of the product. The table shows projected profits, in millio

Table 2. Decision process for the commercialization of the p

States of nature
Decision alternative Demand low- Demand low
utility average - utility
Manufacture 215 242
Subcontract 213 241
Buy 213 254
Lease 215 249
Outsource 214 246
Probabilities Ʃ = 1 0.22 0.19

Questions:
Solution:
e. Use EVPI to determine if the company should try to get a better estimate of the

Decision Trees
Probability

MANUFACTURE Low
NODE 2
Low average

High Medium

High

Low

Low average
SUBCONTRACT
High Medium
NODE 3

High

Low
 Low

Low average
BUY
NODE 4
High Medium
NODE 1
High

Low

Low average
NODE 5
LEASE High Medium

High

Low

Low average
NODE 6
High Medium

OUTSOURCE High

Expected value is obtained: VESIP

NODE 2 246.710 dollars

NODE 3 247.660 dollars
NODE 4 248.890 dollars
NODE 5 249.320 dollars
NODE 6 249.990 dollars

Node 1= (Max Node 3-Node 4)= NODE 4= 250.0

The recommended decision is to manufacture waiting for a payment of

250.0 millions
VEIP= ǀ VEcIP-VEsIP ǀ
 EVwPI= 252.89 millions
EVwoPI= 250.0
EVPI= 2.90 millions

b. A test market study of potential product demand is expected to report a favorab

condition. The relevant conditional probabilities are:

FAVORABLE
Previous Conditional
States of nature probabilitie probabilities
s P (Sj) (F/sj)
LOW 0.22 0.2
LOW AVERAGE 0.19 0.2
HIGH MEDIUM 0.29 0.35
HIGH 0.3 0.5
P(F)

UNFAVORABLE
Previous Conditional
States of nature probabilitie probabilities
s P (Sj) (D/sj)
LOW 0.22 0.8
LOW AVERAGE 0.19 0.8
HIGH MEDIUM 0.29 0.65
HIGH 0.3 0.5
P(D)

FAVORABLE 0.33
NODE 2
NODE 1
 UNFAVORABLE 0.67
NODE 3

c. What is the expected value of market research information?

To find the value of the sample information we have to: VEIM= ǀVEcIM-VEsIMǀ

VEcIM= 248.890 millions

VEsIM 252.890 millions

d. What is the efficiency of the information?

VEIM= 4.00
 VEIM
E= *100
VEIP

4.00 138
E=
2.90

EFFICIENCY OF 138%
EES, EVPI and EVMI
mponents for the introduction in its
a new product in its main plant,
om an external supplier. The profits
ojected profits, in millions of dollars.

mercialization of the product

States of nature
Demand High Demand
Medium - utility High - utility
257 263
249 276
253 268
249 275
253 276
0.29 0.3

a better estimate of the demand.

Demand

0.22 215 47.30

0.19 242 45.98

0.29 257 74.53

0.3 263 78.90

0.22 213 46.86

0.19 241 45.79

0.29 249 72.21

0.3 276 82.80

 0.22 213 46.86

0.19 254 48.26

0.29 253 73.37

0.3 268 80.40

0.22 215 47.30

0.19 249 47.31

0.29 249 72.21

0.3 275 82.50

0.22 214 47.08

0.19 246 46.74

0.29 253 73.37

0.3 276 82.80

millions

payment of
cted to report a favorable (F) or unfavorable (U)

E
Joint Later
possibilities possibilitie
P(F n Sj) s P(sj/F)
0.04 0.13
0.04 0.11
0.10 0.30
0.15 0.45
0.33

LE
Joint Later
possibilities possibilitie
P(D n Sj) s P(sj/D)
0.18 0.26
0.15 0.23
0.19 0.28
0.15 0.23
0.67
LOW 0.13 215
MANUFACTURE
NODE 4 LOW AVERAGE 0.11 242

HIGH MEDIUM 0.30 257

HIGH 0.45 263

LOW 0.13 213

SUBCONTRACT
LOW AVERAGE 0.11 241
NODE 5
 HIGH MEDIUM 0.30 249

HIGH 0.45 276

LOW 0.13 213

BUY
LOW AVERAGE 0.11 254
NODE 6
HIGH MEDIUM 0.30 253

HIGH 0.45 268

LOW 0.13 215

LEASE
LOW AVERAGE 0.11 249
NODE 7
HIGH MEDIUM 0.30 249

HIGH 0.45 275

LOW 0.13 214

OUTSOURCE
LOW AVERAGE 0.11 246
NODE 8
HIGH MEDIUM 0.30 253

HIGH 0.45 276

LOW 0.26 215

MANUFACTURE
LOW AVERAGE 0.23 242
NODE 9
HIGH MEDIUM 0.28 257

HIGH 0.23 263

SUBCONTRACT LOW 0.26 213

NODE 10
 NODE 10
LOW AVERAGE 0.23 241

HIGH MEDIUM 0.28 249

HIGH 0.23 276

LOW 0.26 213

BUY
LOW AVERAGE 0.23 254
NODE 11
HIGH MEDIUM 0.28 253

HIGH 0.23 268

LOW 0.26 215

LEASE LOW AVERAGE 0.23 249

NODE 12
HIGH MEDIUM 0.28 249

HIGH 0.23 275

LOW 0.26 214

OUTSOURCE
LOW AVERAGE 0.23 246
NODE 13
HIGH MEDIUM 0.28 253

HIGH 0.23 276

IM= ǀVEcIM-VEsIMǀ
252.448

255.483
 254.583
254.583

256.208

257.402

248.9

243.839
243.746

246.041
246.041

245.873

246.281
 Problem 3. DECISION TREES, EVPI and EVMI
Teratextyl, a textile company that has a productive experience in the foreign m
years, must decide if it manufactures a new product in its main plant, or if on the
purchase from an external supplier. The profits depend on the demand of the pr
table shows projected profits, in millions of dollars.

Table 3. Decision process for the commercialization of the p

States of nature
Decision alternative Demand low- Demand low
utility average - utility
Manufacture 85 87
Subcontract 78 81
Buy 82 85
Lease 83 85
Outsource 85 87
Probabilities Ʃ = 1 0.30 0.22

Questions:
Solution:
i. Use EVPI to determine if the company should try to get a better estimate of the d

Decision Trees
Probability

MANUFACTURE Low
NODE 2
Low average

High Medium

High

Low

Low average
SUBCONTRACT
High Medium
NODE 3

High

Low
 Low

Low average
BUY
NODE 4
High Medium
NODE 1
High

Low

Low average
NODE 5
LEASE High Medium

High

Low

Low average
NODE 6
High Medium
OUTSOURCE
High

Expected value is obtained: VESIP

89.24
NODE 2 82.94 millions
NODE 3 85.75 millions
NODE 4 86.28 millions
NODE 5 88.28 millions
NODE 6 millions
(Max Node 2-Node 6)=
Node 1= NODE 2= 89.24

The recommmillions
89.24

89.24
EVwPI= 89.24 millions
EVwoPI= 0.00 millions
condition.
The
relevant
condition
al EVPI= millions
probabiliti
es are:

FAVORABLE
States of nature
Previous Conditional
probabilitie probabilities
LOW s P (Sj) (F/sj)
LOW AVERAGE 0.30 0.22
HIGH MEDIUM 0.22 0.35
HIGH 0.25 0.33
0.23 0.42
P(F)

UNFAVORABLE
States of nature
Previous Conditional
probabilitie probabilities
LOW s P (Sj) (D/sj)
LOW AVERAGE 0.30 0.78
HIGH MEDIUM 0.22 0.65
HIGH 0.25 0.67
0.23 0.58
P(D)

FAVORABLE
0.32
NODE 2
NODE 1
 UNFAVORABLE
0.68
NODE 3

k. What is the expected value of market research information?

To find the value of the sample information we have to: VEIM= ǀVEcIM-VEsIMǀ
89.240
VEcIM= 89.240 millions
VEsIM millions

l. What is the efficiency of the information?

0
VEIM=
VEIM
VEIP
E= *100
 0
0 0
E=
EFFICIENCY OF
0%
EES, EVPI and EVMI
erience in the foreign market of 30
main plant, or if on the contrary the
on the demand of the product. The
ons of dollars.

mercialization of the product

States of nature
Demand High Demand
Medium - utility High - utility
91 95
85 89
87 90
87 91
89 93
0.25 0.23

better estimate of the demand.

Demand

0.30 85 25.5

0.22 87 19.14

0.25 91 22.75

0.23 95 21.85

0.30 78 23.4

0.22 81 17.82

0.25 85 21.25

0.23 89 20.47
0.30 82 24.6

0.22 85 18.7

0.25 87 21.75

0.23 90 20.7

0.30 83 24.9

0.22 85 18.7

0.25 87 21.75

0.23 91 20.93

0.30 85 25.5

0.22 87 19.14

0.25 89 22.25

0.23 93 21.39

millions
 Joint Later
possibilities possibilitie
P(F n Sj) s P(sj/F)
0.07 0.20
0.08 0.24
0.08 0.26
0.10 0.30
0.32

Joint Later
possibilities possibilitie
P(D n Sj) s P(sj/D)
0.23 0.35
0.14 0.21
0.17 0.25
0.13 0.20
0.68
LOW 0.20 85
MANUFACTURE
NODE 4 LOW AVERAGE 0.24 87

HIGH MEDIUM 0.26 91

HIGH 0.30 95

LOW 0.20 78
SUBCONTRACT
LOW AVERAGE 0.24 81
NODE 5
HIGH MEDIUM 0.26 85

HIGH 0.30 89
 LOW 0.20 82
BUY
LOW AVERAGE 0.24 85
NODE 6
HIGH MEDIUM 0.26 87

HIGH 0.30 90

LOW 0.20 83
LEASE
LOW AVERAGE 0.24 85
NODE 7
HIGH MEDIUM 0.26 87

HIGH 0.30 91

LOW 0.20 85
OUTSOURCE
LOW AVERAGE 0.24 87
NODE 8
HIGH MEDIUM 0.26 89

HIGH 0.30 93

LOW 0.35 85
MANUFACTURE
LOW AVERAGE 0.21 87
NODE 9
HIGH MEDIUM 0.25 91

HIGH 0.20 95

SUBCONTRACT LOW 0.35 78

NODE 10
LOW AVERAGE 0.21 81

HIGH MEDIUM 0.25 85

 HIGH 0.20 89

LOW 0.35 82
BUY
LOW AVERAGE 0.21 85
NODE 11
HIGH MEDIUM 0.25 87

HIGH 0.20 90

LOW 0.35 83

LEASE LOW AVERAGE 0.21 85

NODE 12
HIGH MEDIUM 0.25 87

HIGH 0.20 91

LOW 0.35 85
OUTSOURCE
LOW AVERAGE 0.21 87
NODE 13
HIGH MEDIUM 0.25 89

HIGH 0.20 93

IM= ǀVEcIM-VEsIMǀ
90.01

83.81
 90.01
86.40

86.90

88.90

89.240

88.87

82.53
 88.87
85.44

85.984511

87.984511
PROBLEM 1

PROBLEM 2
PROBLEMA 3