STATISTICS F/BUSINESS+ECONOMICS-TEXT
13th Edition
ISBN: 9781305881884
Author: Anderson
Publisher: CENGAGE L
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Textbook Question
Chapter 21.3, Problem 8E
Consider a variation of the PDC decision tree shown in Figure 21.5. The company must first decide whether to undertake the market research study. If the market research study is conducted, the outcome will either be favorable (F) or unfavorable (U). Assume there are only two decision alternatives d1 and d2 and two states of nature s1 and s2. The payoff table showing profit is as follows:
| State of Nature | ||
| Decision Alternative | s1 | s2 |
| d1 | 100 | 300 |
| d2 | 400 | 200 |
- a. Show the decision tree.
- b. Use the following probabilities. What is the optimal decision strategy?
| P(F) = .56 | P(s1 | F) = .57 | P(s1 | U) = .18 | P(s1) = .40 |
| P(U) = .44 | P(s2 | F) = .43 | P(s2 | U) = .82 | P(s2) = .60 |
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The following payoff table provides profits based on various possible decision alternatives and various levels of demand.
ALTERNATIVE
DEMAND
LOW
MEDIUM
HIGH
Alternative 1
40
80
150
Alternative 2
80
120
130
Alternative 3
100
100
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a. Which alternative would a pessimist choose?
b. Which alternative would an optimist choose?
c. Which alternative should be chosen using the Hurwicz decision criterion with α = 0.4?
Chapter 21 Solutions
STATISTICS F/BUSINESS+ECONOMICS-TEXT
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