Question

SciTools Incorporated, a company that specializes in scientific instruments, has been invited to make a bid on a government contract. The contract calls for a specific number of these instruments to be delivered during the coming year. The bids must be sealed, so that no company knows what the others are bidding, and the low bid wins the contract. SciTools estimates that it will cost $100k to supply the instruments if it wins the contract. The company is deciding to bid against the competitors. On the basis of past contracts of this type, SciTools believes that the competitors’ bids are based on the following probabilities and they have created the payoff table as follows.

Probability...........0.35............0.05................0.60
...................................If the competitors' lowest bid is
----------------------------------------------------------------------------------------
..........................$120k-$135k...$135k-$140k...more than $140k
bid 120k (low)...........20k............20k...............20k
bid 135k (medium).....0................35k...............35k
bid 140k (high)...........0..................0...................40k

1. What is the best decision based on optimistic approach?
   1. To bid low
   2. To bid medium
   3. To bid high
2. What is the best decision based on pessimistic approach?
   1. To bid low
   2. To bid medium
   3. To bid high
3. How much (in thousands) is the average payoff if the company bids low?
4. How much (in thousands) is the average payoff if the company bids medium?
5. How much (in thousands) is the average payoff if the company bids high?
6. What is the best decision based on equal likelihood approach?
   1. To bid low
   2. To bid medium
   3. To bid high
7. How much (in thousands) is the expected payoff if the company bids low?
8. How much (in thousands) is the expected payoff if the company bids medium?
9. How much (in thousands) is the expected payoff if the company bids high?
10. What is the best decision based on expected value approach?
    1. To bid low
    2. To bid medium
    3. To bid high
11. How much (in thousands) is the expected payoff if the company has full information about competitors' bid?
12. Calculate the expected value of perfect information (in thousands)?
13. How much (in thousands) is the maximum regret of the company if they bid low?
14. How much (in thousands) is the maximum regret of the company if they bid medium?
15. How much (in thousands) is the maximum regret of the company if they bid high?
16. What is the best decision based on minimax regret approach?
    1. To bid low
    2. To bid medium
    3. To bid high

Answer 1