Question

The owner of a small business is considering three options: buying a computer, leasing a computer, or getting along without a computer. Based on the information obtained from the firm’s accountant, the following payoff table (in terms of net profit) was developed:

State of Nature | |||

Alternative | S1 | S2 | S3 |

A1 | 4 | 2 | 5 |

A2 | 8 | 2 | 3 |

A3 | 3 | 4 | 6 |

Based on the probability for each state of nature in previous
question(the probability for S1 to happen is twice of the
probability of S2. Probability for S2 to happen is three times of
S3). Which decision alternative should be selected based on
expected payoff?

Select one:

a. Can’t be computed with the given information

b. A3

c. A1

d. A2

Answer #1

Given data:

Alternative | State of nature | ||

S1 | S2 | S3 | |

A1 | 4 | 2 | 5 |

A2 | 8 | 2 | 3 |

A3 | 3 | 4 | 6 |

probability for s1 happen =p1

probability for s2 happen = p2

probability for s3 happen= p3

p1=2p2

p2=3p3

p1=6p3

p1+p2+p3=1

6p3+3p3+p3=10

p3=0.1

P2=0.3

p1=0.6

Expected value = sum of pi*si

pi | 0.6 | 0.3 | 0.1 | Expected payoff value |

Alternative | State of nature | |||

S1 | S2 | S3 | ||

A1 | 4 | 2 | 5 | 3.5 |

A2 | 8 | 2 | 3 | 5.7 |

A3 | 3 | 4 | 6 | 3.6 |

so maximum expected profit (payoff) value 5.7. its on alternative -2

so we decide A2 alternative as per maximum payoff

**Option
-D**

The owner of a small business is considering three options:
buying a computer, leasing a computer, or getting along without a
computer. Based on the information obtained from the firm’s
accountant, the following payoff table (in terms of net profit) was
developed:
State of Nature
Alternative
S1
S2
S3
A1
4
2
5
A2
8
2
3
A3
3
4
6
Based on the probability for each state of nature in previous
question(the probability for S1 to happen is twice...

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S2
S3
A1
113
96
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62
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INNOVATION
Deep Change: How Operational Innovation Can Transform Your
Company
by
Michael Hammer
From the April 2004 Issue
Save
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