1. A baker produces a certain type of special pastry at a total average cost of Rs.
3 and sell it
at a price of Rs.5. This pastry is produced over the weekend and is sold during the following
week; such pastry being produced but not sold during a week’s time are totally spoiled and
have to be thrown. According to past experience, the weekly demand for these pastries is
never less than 78 or greater than 80.
You are required to formulate:
(i) Courses of action;
(ii) States of nature;
(iii) payoff table; and
(iv) loss table
2. A doctor has been thinking about starting his own independent nursing home. The problem
is to decide how large the nursing home should be. The annual returns will depend on the
size of the nursing home and the number of marketing factors. After a careful analysis, the
doctor developed the following table:
Marketing Factors Size of nursing home
(Rs.) Small Medium Large Very
Large
Good 50,000 70,000 90,000 200,000
Fair 20,000 35,000 35,000 25,000
Poor -10,000 -25,000 -45,000 -120,000
i. What is the maximaxi decision?
ii. What is the maximini decision?
iii. What is the equally likely decision?
iv. What is the criteria of realism for α =0.8 ?
v. Develop an opportunity loss table and determine the minimaxi regret criterion.
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3. A computer hardware company is planning to start a multi-centre computer software training
organization. The company feels that such an attempt would create an awareness of
computer usage among public and employees of different organizations which in turn will
improve the demand for computer hardware.
The company has decided to start training centres as per one of the following options or in
combination of them.
(a) Starting training centres only in urban areas.
(b) Starting training centres in semi-urban areas.
(c) Starting training centres only in other countries.
There are three possible chance events for the demands of its services: high demand,
medium demand and low demand.
The company has listed the following alternatives for consideration:
(a) Starting training centres in urban areas, semi-urban areas and in other countries
simultaneously and continuing the business for the next five consecutive years by
investing Rs. 50 million.
(b) First starting training centres in urban areas only and continuing the business for the
next two years by investing Rs.10 million. Then, based on the demand, the company will
decide to do any one of the following:
(1) On high demand: The company may start training centres in semi-urban areas and
other countries simultaneously and continue the business for another three years by
investing Rs. 60 million, or the company may not expand the business for the next
three years.
(2) On medium demand: The company may start training centres only in semi-urban
areas and continue the business for another three years by investing Rs. 30 million,
or the company may not expand the business for the next three years.
(3) On low demand: The company may not expand the business for the next three
years.
A market survey indicates that the probabilities of having a high, medium and low demand over
the next 5 years are 0.6, 0.3 and 0.1 respectively.
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Estimates of annual income for each of the alternatives are given as follows:
- Training centres in urban areas, semi-urban areas and in other countries with high,
medium and low demand will yield Rs. 500, Rs. 300 and Rs. 100 million annually
respectively.
- Training centres in urban areas with high, medium and low demand will yield Rs. 70, Rs.
50 and Rs. 30 million annually respectively.
- Expanded training centres in semi-urban areas and in other countries simultaneously
with high, medium and low demand will yield Rs. 350, Rs. 200 and Rs. 50 million
annually respectively.
- Expanded training centres in semi-urban areas with high, medium and low demand will
yield Rs. 200, Rs. 150 and Rs. 40 million annually respectively.
Construct a decision tree and use it to determine the best investment decision.
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