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  • Decision Theory Expected Values

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    michean mabao
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    The document presents a quantitative problem involving the expected profits from renting motorcycles. JC rents motorcycles for 650 PHP each and leases them for 400 PHP. The number of motorcycles rented each day varies from 10 to 30. Under expected value, JC should lease 15 motorcycles daily for an expected profit of 3,425 PHP. The EVPI is 1,575 PHP. It would be better for the business to be conservative. Under maximax, leasing 30 motorcycles gives the highest possible payoff of 7,500 PHP. Under maximin, leasing 10 motorcycles gives the highest guaranteed payoff of 2,500 PHP. Under minimax, leasing 15 motorcycles gives the

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    The document presents a quantitative problem involving the expected profits from renting motorcycles. JC rents motorcycles for 650 PHP each and leases them for 400 PHP. The number of motorcycles rented each day varies from 10 to 30. Under expected value, JC should lease 15 motorcycles daily for an expected profit of 3,425 PHP. The EVPI is 1,575 PHP. It would be better for the business to be conservative. Under maximax, leasing 30 motorcycles gives the highest possible payoff of 7,500 PHP. Under maximin, leasing 10 motorcycles gives the highest guaranteed payoff of 2,500 PHP. Under minimax, leasing 15 motorcycles gives the

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    61 views4 pages

    Decision Theory Expected Values

    Uploaded by

    michean mabao
    The document presents a quantitative problem involving the expected profits from renting motorcycles. JC rents motorcycles for 650 PHP each and leases them for 400 PHP. The number of motorcycles rented each day varies from 10 to 30. Under expected value, JC should lease 15 motorcycles daily for an expected profit of 3,425 PHP. The EVPI is 1,575 PHP. It would be better for the business to be conservative. Under maximax, leasing 30 motorcycles gives the highest possible payoff of 7,500 PHP. Under maximin, leasing 10 motorcycles gives the highest guaranteed payoff of 2,500 PHP. Under minimax, leasing 15 motorcycles gives the

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    of 4

    QUANTITATIVE TECHNIQUES

    JC motorcycle rental business leases motorcycle daily for 400 per m/c and rents them out at P650 each.
    The results of the business are given below.
    no. of m/c rented/day no. of days occurrence
    10 10
    15 15
    20 20
    25 25
    30 30

    Under expected value criterion


    a. how many m/c's should JC lease on any given day?
    b. How much is his expected profit?
    c. What is the EVPI?
    d. Would it be better in this business to be aggressive or conservative?

    Additional Question
    e. Find the best action under maximax criterion?
    f. Find the best action under maximin criterion?
    g. Find the best action under minimax criterion?

    Solutions:
    Rents each 650 php
    lease cost 400
    Contribution margin 250 php

    PAYOFF TABLE (EXPECTED VALUES)


    no. of day of Event\Action 10 15 20 25 30 EPPI
    occurrence
    0.10 10 2,500 500 -1,500 -3,500 -5,500 2,500
    0.30 15 2,500 3,750 1,750 -250 -2,250 3,750
    0.25 20 2,500 3,750 5,000 3,000 1,000 5,000
    0.20 25 2,500 3,750 5,000 6,250 4,250 6,250
    0.15 30 2,500 3,750 5,000 6,250 7,500 7,500
    1.00 EMV 2,500 3,425 3,375 2,513 1,000 5,000

    Under expected value criterion


    a. how many m/c's should JC lease on any given day? (under expected value criterion) 15 motorcycles
    b. How much is his expected profit? Php 3,425
    c. What is the Expected value of Perfect Information (EVPI)?
    EVPI = EPPI - EMV
    EVPI = 5,000 - 3,425
    EVPI = Php 1,575

    d. Would it be better in this business to be aggressive or conservative?


    Consevatism Aggressive
    EMV @ 15 m/c 3,425 EMV @ 15 m/c 3,425
    EMV @ 10 m/c (2,500) EMV @ 30 m/c (1,000)
    925 2,425

    ; It would be better for the business to be conservative.

    PAYOFF TABLE (MAXIMAX CRITERION) PAYOFF TABLE (M


    Event\Action 10 15 20 25 30
    10 2,500 500 -1,500 -3,500 -5,500
    15 2,500 3,750 1,750 -250 -2,250
    20 2,500 3,750 5,000 3,000 1,000
    25 2,500 3,750 5,000 6,250 4,250
    30 2,500 3,750 5,000 6,250 7,500

    REGRETS TABLE (MINIMAX CRITERION)


    Event\Action 10 15 20 25 30
    10 0 2,000 4,000 6,000 8,000
    15 1,250 0 2,000 4,000 6,000
    20 2,500 1,250 0 2,000 4,000
    25 3,750 2,500 1,250 0 2,000
    30 5,000 3,750 2,500 1,250 0

    Additional Questions
    e. Find the best action under maximax criterion?
    The largest payoff if JC will have 10, 15, 20, 25, and 30 motorcylces are ₱2,500, ₱3,750, ₱5,000, ₱6,250 and ₱7,500 res
    Since the largest of those is ₱7,500, JC would need to have 30 motorcycles.

    f. Find the best action under maximin criterion?


    The smallest payoff if JC will have 10, 15, 20, 25, and 30 motorcylces are ₱2,500, ₱500, -₱1,500, -₱3,500 and -₱5,500 re
    Since the largest of those is ₱2,500, JC would need to have 10 motorcycles.

    g. Find the best action under minimax criterion?


    The largest losses if JC will have 10, 15, 20, 25, and 30 motorcylces are ₱5,000, ₱3,750, ₱4,000, ₱6,000 and ₱8,000 resp
    Since the smallest of those is ₱3,750, JC would need to have 15 motorcycles.
    REGRETS TABLE
    no. of day of Event\Action 10 15 20 25 30
    occurrence
    0.10 10 0 2,000 4,000 6,000 8,000
    0.30 15 1,250 0 2,000 4,000 6,000
    0.25 20 2,500 1,250 0 2,000 4,000
    0.20 25 3,750 2,500 1,250 0 2,000
    0.15 30 5,000 3,750 2,500 1,250 0
    1.00 EOL 2,500 1,575 1,625 2,488 4,000
    PAYOFF TABLE (MAXIMIN CRITERION)
    Event\Action 10 15 20 25 30
    10 2,500 500 -1,500 -3,500 -5,500
    15 2,500 3,750 1,750 -250 -2,250
    20 2,500 3,750 5,000 3,000 1,000
    25 2,500 3,750 5,000 6,250 4,250
    30 2,500 3,750 5,000 6,250 7,500

    6,250 and ₱7,500 respectively.

    ₱3,500 and -₱5,500 respectively.

    6,000 and ₱8,000 respectively.

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