QUESTION 1
A farmer must decide which crop to plant next year on his land: corn, peanuts, or soybeans. The return
from each crop will be determined by whether a new trade bill with another country passes the Senate.
The profit the farmer will realize from each crop, given the two possible results on the trade bill, is shown
in the following payoff table:
Pass Fail
Corn 30,000 8,000
Peanuts 18,000 13,000
Soybeans 21,000 18,000
Determine the best crop to plant, using the following decision criteria. (3 points each)
Pinakamataas pipiliin
a. Maximax = 30 000
b. Maximin = 18 000
c. Minimax regret = Soybeans , 9 000
Pass Fail
Corn 30,000 -30 000 = 0 18 000 - 8,000 = 10 000
Peanuts 30 000 -18,000 = 12 000 18 000 - 13,000 = 5 000
Soybeans 30 000 -21,000 – 30 000 = 9 000 18 000 - 18,000 = 0
d. Hurwicz (a = 0.30)
Total
Corn 30,000( .3) + 8,000 (.7) 14 600
Peanuts 18,000 (.3) + 13,000 (.7) 14 500
Soybeans 21,000 (.3) + 18,000 (.7) 18 900
e. Equal likelihood
simplest form to calculate (30 000 + 8000) / 2
Total
Corn 30,000( .5) + 8,000 (.5) 19 000
Peanuts 18,000 (.5) + 13,000 (.5) 15 500
Soybeans 21,000 (.5) + 18,000 (.5) 19 500
Summary of Criteria Results
The decisions indicated by the decision criteria examined so far can be summarized as follows:
Criterion Decision (Purchase)
Maximax Corn
Maximin Soybeans
Minimax regret Soybeans
Hurwicz Soybeans
Equal likelihood Soybeans
Sample:
QUESTION 2
Microcomp is a manufacturer of personal computers. It is planning to build a new manufacturing and
distribution facility in either South Korea, China, Taiwan, the Philippines, or Mexico. It will take
approximately 5 years to build the necessary infrastructure (roads, etc.), construct the new facility, and
put it into operation. The eventual cost of the facility will differ between countries and will even vary within
countries depending on the financial, labor, and political climate, including monetary exchange rates. The
company has estimated the facility cost (in P1,000,000s) in each country under three different future
economic and political climates, as follows:
COUNTRY DECLINE (minimax) SAME IMPROVE (minimin)
South Korea 21.7 19.1 15.2
China 19.0 18.5 17.6
Taiwan 19.2 17.1 14.9
Philippines 22.5 16.8 13.8
Mexico 25.0 21.2 12.5
Determine the best decision, using the following decision criteria. (3 points each)
a. Minimin = Mexico, 12.5
b. Minimax (21.7, 19.0, 19.2, 22.5, 25.0) = 19.0 select China
best of best
c. Minimax Regret Min (2.7, 5.1, 2.4 , 3.5 , 6) = 2.4 select Taiwan
COUNTRY DECLINE SAME IMPROVE Maximum Regret
(minimax) (minimin)
Input yung pinaka mataas, then sa pag decide ng
answer kunin yung pinakamababa
South Korea 21.7 – 19.0 = 2.7 19.1 – 16.8 = 2.3 15.2 – 12.5 = 2.7 2.7
China 19.0 – 19.0 = 0 18.5 – 16.8 = 1.7 17.6 – 12.5 = 5.1 5.1
Taiwan 19.2 – 19.0 = .2 17.1 – 16.8 = 0.3 14.9 – 12.5 = 2.4 2.4
Philippines 22.5 – 19.0 = 3.5 16.8 – 16.8 = 0 13.8 – 12.5 = 1.3 3.5
Mexico 25.0 – 19.0 =6 21.2 – 16.8 = 4.4 12.5 – 12.5 = 0 6
d. Realism (Hurwicz) Hurwicz (a = 0.40)
a = coefficient of optimism
Improve = a (optimistic)
COUNTRY Decline Improve TOTAL
South Korea 21.7 (.60) + 15.2 (0.40) 19.1
18.44
China 19.0 (0.60) + 17.6 (0.40)
17.48
Taiwan 19.2 (0.60) + 14.9 (0.40
Philippines 22.5 (0.60) + 13.8 (0.40) 19.02
20
Mexico 25.0 (.60) + 12.5 (0.40)
e. Equal likelihood Equally Likely (Laplace)
(21.7+19.1+15.2) / 3
COUNTRY DECLINE SAME IMPROVE EQUAL LIKELY
(minimax) (minimin) LAPLACE
AVERAGE
Divide 3
South Korea 21.7 19.1 15.2 18.67
China 19.0 18.5 17.6 18.37
Taiwan 19.2 17.1 14.9 17.067
Philippines 22.5 16.8 13.8 17.7
Mexico 25.0 21.2 12.5 19.567
Summary of Criteria Results
The decisions indicated by the decision criteria examined so far can be summarized as follows:
Criterion Decision (Purchase)
Minimin Mexico, 12.5
Minimax (21.7, 19.0, 19.2, 22.5, 25.0) = 19.0 select China
Minimax Regret Min (2.7, 5.1, 2.4 , 3.5 , 6) = 2.4 select Taiwan
Hurwicz Taiwan, 16.85
Equal likelihood Taiwan, 17.067
QUESTION 3
Given the following sequential decision tree, determine which is the optimal investment, A or B? Why?
First, the expected value of the payoffs is computed at each
probability node:
UMPISA SA DULOOO
EV Node 7 = .40 (300 000) + .60 (60 000) = 156 000
EV Node 8 = .20 (200 000) + .80 (70 000) = 96 000
EV NODE 9 = .35 (105 000) + .65 (40 000) = 62 750
Second step : EV Node Step 1 Total MINUS (-$00,000)
EV NODE 4 = 156 000 – 20 000 = 136 000
EV NODE 5 = 96 000- 17 000 = 79 000
EV NODE 6 = 62 750 – 9 000 = 53 750 < 55 000
Third Step :
EV NODE 2 : (.30 * 136 000) + (75 000 * .70) =93 300
EV NODE 3 : (0.15 * 79 000) + (0.55 * 55000) + (.30 * 80000) = 66 100
EMV of Investment A
93 300 – 70 000 = 23 300
EMV of Investment B
66 100 – 50 000 = 16 100
EMV of Investment A is higher than B. Hence, Investment A is the optimal investment
ANSWER:
Criterion Decision (Purchase)
Maximax Corn
Maximin Soybeans
Minimax regret Soybeans
Hurwicz Soybeans
Equal likelihood Soybeans
SOLUTION:
A. Maximax = 30 000 Corn
b. Maximin = 18 000 Soybeans
c. Minimax regret = Soybeans , 9 000
Pass Fail
Corn 30,000 -30 000 = 0 18 000 - 8,000 = 10 000
Peanuts 30 000 -18,000 = 12 000 18 000 - 13,000 = 5 000
Soybeans 30 000 -21,000 – 30 000 = 9 000 18 000 - 18,000 = 0
d. Hurwicz (a = 0.30) Soybeans
Total
Corn 30,000( .3) + 8,000 (.7) 14 600
Peanuts 18,000 (.3) + 13,000 (.7) 14 500
Soybeans 21,000 (.3) + 18,000 (.7) 18 900
e. Equal likelihood
Total
Corn 30,000( .5) + 8,000 (.5) 19 000
Peanuts 18,000 (.5) + 13,000 (.5) 15 500
Soybeans 21,000 (.5) + 18,000 (.5) 19 500
ANSWER:
Criterion Decision (Purchase)
Minimin Mexico
Minimax China
Minimax Regret Taiwan
Hurwicz Taiwan
Equal likelihood Taiwan
SOLUTION:
a. Minimin = Mexico, 12.5
b. Minimax (21.7, 19.0, 19.2, 22.5, 25.0) = 19.0 select China
c.Minimax Regret Min (2.7, 5.1, 2.4 , 3.5 , 6) = 2.4 select Taiwan
Maximum Regret
COUNTRY DECLINE SAME IMPROVE
South Korea 21.7 – 19.0 = 2.7 19.1 – 16.8 = 2.3 15.2 – 12.5 = 2.7 2.7
China 19.0 – 19.0 = 0 18.5 – 16.8 = 1.7 17.6 – 12.5 = 5.1 5.1
Taiwan 19.2 – 19.0 = .2 17.1 – 16.8 = 0.3 14.9 – 12.5 = 2.4 2.4
Philippines 22.5 – 19.0 = 3.5 16.8 – 16.8 = 0 13.8 – 12.5 = 1.3 3.5
Mexico 25.0 – 19.0 =6 21.2 – 16.8 = 4.4 12.5 – 12.5 = 0 6
d. Hurwicz (a = 0.40) Taiwan
COUNTRY Decline Same Improve TOTAL
South Korea 21.7 (.30) + 19.1 (.30) + 15.2 (0.40) 18.32
China 19.0 (0.30) + 18.5 (0.30) + 17.6 (0.40) 18.29
Taiwan 19.2 (0.30) + 17.1(.30)+ 14.9 (0.40 16.85
Philippines 22.5 (0.30) +16.8(0.30) + 13.8 (0.40) 17.31
Mexico 25.0 (.30) + 21.2 (0.30) + 12.5 (0.40) 18.86
e. Equal likelihood
EQUAL
LIKELY
COUNTRY DECLINE SAME IMPROVE
Divide 3
South Korea 21.7 19.1 15.2 18.67
China 19.0 18.5 17.6 18.37
Taiwan 19.2 17.1 14.9 17.067
Philippines 22.5 16.8 13.8 17.7
Mexico 25.0 21.2 12.5 19.567
ANSWER:
EMV of Investment A is higher than B. Hence, Investment A is the optimal investment
SOLUTION:
EV Node 7 = .40 (300 000) + .60 (60 000) = 156 000
EV Node 8 = .20 (200 000) + .80 (70 000) = 96 000
EV NODE 9 = .35 (105 000) + .65 (40 000) = 62 750
EV NODE 4 = 156 000 – 20 000 = 136 000
EV NODE 5 = 96 000- 17 000 = 79 000
EV NODE 6 = 62 750 – 9 000 = 53 750 < 55 000
EV NODE 2 : (.30 * 136 000) + (75 000 * .70) =93 300
EV NODE 3 : (0.15 * 79 000) + (0.55 * 55000) + (.30 * 80000) = 66 100
EMV of Investment A
93 300 – 70 000 = 23 300
EMV of Investment B
66 100 – 50 000 = 16 100
