Activity in Management Science
The payoff table of Princess Bank is presented as follows:
Alternatives Favorable Market Condition Unfavorable Market Condition
Establish a full-blown branch 300,000 -200,000
Establish a Branch-lite unit 150,00 -40,000
Not establish a full-blown branch 0 0
nor a branch-lite unit
The probabilities are 60% for favorable market condition and 40% for unfavorable
market condition.
Required. Using the Expected Opportunity Loss approach, determine which alternative
should be selected.
Alternative Favorable Unfavorable Maximum
Full Blown 300,000-300,000 (-200,000)-0 200,000
Branch-lite 300,000-150,000 (-40,000)-0 150,000
Not establish 300,000-0 0 300,000
DECISION MAKING
1. Expected Monetary Value
Variations: EMV with perfect informatiom
= (1st State of Nature*P1)+ (2 State of Nature* P2)...
EMV without perfect information
= (Max. Payoff of SON*P1)+(Max. Payoff of SON *P2)...
Case 1: Favorable Condition; 60%
Unforavorable Condition; 40%
1. EMV without perfect information
Alternative 1= (300,000*60%)+(-200,000*40%)
=180,000+(-80,000)
= 100,000
Alternative 2 = (150,000*60%)+(-40,000*40%)
= 90,000+(-16,000)
= 74,000
Alternative 3= (0)
EMV with perfect information
Alternative 1 = (300,000*60%)+(0*40%)
= 180,000+0
= 180,000
EMV of Perfect Information
EMV with Perfect Information-EMV without Perfect Information
= 180,000-100,000
= 80,000
Expected Opportunity Loss Approach
Alternative 1= (300,000*60%)+(-200,000*40%)
=180,000+(-80,000)
= 100,000
Alternative 2 = (150,000*60%)+(-40,000*40%)
= 90,000+(-16,000)
= 74,000
Alternative 3= (0)
ECONOMIC ORDER QUANTITY
1. Economic Order Quantity
2x50,000x80=8,000,000/2=4,000,000(SQ. ROOT)=2,000
2. Average Inventory Level
EOQ/2
= 2,000/2
= 1,000
3. Total Carrying Cost
= Average Inventory LevelxCarrying cost per unit
= 1,000x2
= 2,000
4. Total Ordering Cost
= (Annual Demand/EOQ) x Ordering Cost per unit
= (50,000/2,000) x 80
= 2,000
5. Total Annual Inventory Cost
= Total Carrying Cost + Total Ordering Cost
= 2,000 + 2,000
= 4,000
1. MAXIMAX CRITERION
Action 1= 25
Action 2= 23
Action 3=
Step 1: Maximax Criterion
Identify the maximum profit for each action.
For A₁: max(5, 10, 18, 25) = 25
For A₂: max(8, 7, 8, 23) = 23
For A₃: max(21, 18, 12, 21) = 21
For A₄: max(30, 22, 19, 15) = 30
The maximum of these maximums is:
Best action: A₄ with a value of 30.
Step 2: Maximin Criterion
Identify the minimum profit for each action.
For A₁: min(5, 10, 18, 25) = 5
For A₂: min(8, 7, 8, 23) = 7
For A₃: min(21, 18, 12, 21) = 12
For A₄: min(30, 22, 19, 15) = 15
The maximum of these minimums is:
Best action: A₄ with a value of 15.
Step 3: Equally Likely Criterion
Calculate the average for each action.
For A₁: (5 + 10 + 18 + 25) / 4 = 14.5
For A₂: (8 + 7 + 8 + 23) / 4 = 11.5
For A₃: (21 + 18 + 12 + 21) / 4 = 18
For A₄: (30 + 22 + 19 + 15) / 4 = 21.5
The highest average is:
Best action: A₄ with an average of 21.5.
Step 4: Criterion of Realism
Using a coefficient of optimism of 0.5, we compute the weighted values.
A₁: (0.5 * 25 + 0.5 * 5) = 12.5
A₂: (0.5 * 23 + 0.5 * 7) = 15
A₃: (0.5 * 21 + 0.5 * 12) = 16.5
A₄: (0.5 * 30 + 0.5 * 15) = 22.5
The highest weighted value is:
Best action: A₄ with a value of 22.5.
Final Answer
1. Best action using maximax criterion: A₄ (value 30)
2. Best action using maximin criterion: A₄ (value 15)
3. Best action using equally likely criterion: A₄ (average 21.5)
4. Best action using criterion of realism: A₄ (weighted value 22.5)
