Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Chapter 9.6, Problem 28P
a)
Summary Introduction
To display: The certainty equivalent on the tree.
Introduction: Simulation model is the digital prototype of the physical model that helps to
b)
Summary Introduction
To explain: The certainty equivalent in the given cells.
Introduction: Simulation model is the digital prototype of the physical model that helps to forecast the performance of the system or model in the real world.
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Students have asked these similar questions
Your company must decide whether to introduce a new product. The sales of the product will be either at a high (success) or low (failure) level. The conditional value for this decision is as follows
Decision
High
Low
Introduce
$4,000,000
-$2,000,000
Do Not Introduce
0
0
Probability
0.3
0.7
You have the option to conduct a market survey to sharpen you market demand estimate. The survey costs $200,000. The survey provides incomplete information about the sales, with three possible outcomes: (1) predicts high sales, (2) predicts low sales, or (3) inconclusive. Such surveys have in the past provided these results
Result
High
Low
Predicts High
0.4
0.1
Inconclusive
0.4
0.5
Predicts Low
0.2
0.4
c) Draw the complete decision tree, including the survey option.
Explain where the values on the decision tree come from
Select the least accurate statement.
A) The expected monetary value (EMV) criterion represents the long-run average of uncertain outcomes, so it should only be used for recurring decisions.
b) For each possible decision and each possible outcome, the payoff table lists the associated monetary value.
c)The certainty equivalent is the certain dollar amount a risk-averse decision maker would accept in order to avoid a gamble altogether.
D) For a risk-averse decision maker, the certainty equivalent is less than the expected monetary value (EMV).
Question 2
An oil company must decide whether or not to drill an oil well in a particular area that they already
own. The decision maker (DM) believes that the area could be dry, reasonably good or a bonanza.
See data in the table which shows the gross revenues for the oil well that is found.
Decision
Drill
$0
Abandon
$0
Probability 0.3
Dry (D)
Seismic Results
No structure(N)
Open(0)
Closed (C)
Reasonably
good(G)
$85
$0
0.3
Drilling costs 40M. The company can take a series of seismic soundings at a cost of 12M) to
determine the underlying geological structure. The results will be either "no structure", "open
structure or "closed structure". The reliability of the testing company is as follows that is, this
reflects their historical performance.
Bonanza(B)
Note that if the test result is "no structure" the company can sell the land to a developer for 50 m.
otherwise (for the other results) it can abandon the drilling idea at no benefit to itself.
$200 m
$0
0.4
Dry(d)
0.7
0.2
0.1…
Chapter 9 Solutions
Practical Management Science
Ch. 9.2 - Prob. 1PCh. 9.2 - Prob. 2PCh. 9.2 - Prob. 3PCh. 9.3 - Prob. 4PCh. 9.3 - Prob. 5PCh. 9.3 - Prob. 6PCh. 9.3 - Prob. 7PCh. 9.4 - Explain in some detail how the PrecisionTree...Ch. 9.4 - Prob. 9PCh. 9.4 - Prob. 10P
Ch. 9.5 - Prob. 11PCh. 9.5 - Prob. 12PCh. 9.5 - Prob. 13PCh. 9.5 - Prob. 17PCh. 9.5 - Prob. 18PCh. 9.5 - Prob. 19PCh. 9.5 - Prob. 21PCh. 9.5 - The model in Example 9.3 has only two market...Ch. 9.6 - Prob. 26PCh. 9.6 - Prob. 27PCh. 9.6 - Prob. 28PCh. 9 - Prob. 30PCh. 9 - Prob. 31PCh. 9 - Prob. 32PCh. 9 - Prob. 34PCh. 9 - Prob. 36PCh. 9 - Prob. 37PCh. 9 - Prob. 38PCh. 9 - Prob. 39PCh. 9 - Prob. 46PCh. 9 - Prob. 48PCh. 9 - Prob. 53PCh. 9 - Prob. 67PCh. 9 - Prob. 68PCh. 9 - Prob. 69PCh. 9 - Prob. 70PCh. 9 - Prob. 71PCh. 9 - Prob. 72PCh. 9 - Prob. 73PCh. 9 - Prob. 74PCh. 9 - Prob. 75PCh. 9 - Prob. 76PCh. 9 - Prob. 77P
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