Reference no: EM132202617

PART ONE

Assignment: Maximizing Expected Utility and Decision Trees

As explained in this week's resources, maximization of expected utility involves the following five steps of decision making:

1. Identifying future conditions, along with the likelihood of the condition being realized

2. Listing possible alternatives

3. Estimating the payoff or utility for each alternative under each future condition

4. Calculating the expected utility

5. Selecting the best alternative

Decision trees can be used to illustrate all of this information in a graphic manner.

In this Assignment, apply the information from this week's resources to solve decision problems and complete a Decision Analysis for those problems.

Solve problems of the Stevenson text by creating decision trees, determining expected utilities of the decision alternatives, and offering recommended decisions based on the decision tree analysis.

1. What are some of the reasons for poor decisions?

2. Explain or define each of these terms:
a. Laplace criterion.
b. Minimax regret.
c. Expected value.
d. Expected value of perfect information.

3. What information does a decision maker need in order to perform an expected-value analysis of a problem? What options are available to the decision maker if the probabilities of the states of nature are unknown? Can you think of a way you might use sensitivity analysis in such a case?

PART TWO

Select a decision that you have made or that you need to make and formulate it as a decision tree to include the likelihood of the states of nature and the expected utilities of alternative solutions.

Note: This solution should be on a separate page from part one.

Approximate length: 4-5 pages

Resources - See attached text Stevenson Chapter 5 pp. 231-234 Under problems.