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    Practice Problems: Decision Making

    Uploaded by

    Samar Abdel Rahman
    The construction manager must decide whether to build single family homes, apartments, or condominiums. Using the maximin criterion, which assumes the worst outcome, the manager should build single family homes because it has the highest worst-case profit of $70,000. Using the equally likely criterion, which averages the outcomes, the manager should build apartments as it has the highest average profit of $103,300. If the manager were optimistic and used the maximax criterion, which assumes the best outcome occurs, building condominiums would be chosen as it has the highest potential profit of $220,000.

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    Practice Problems: Decision Making

    Uploaded by

    Samar Abdel Rahman
    132 views3 pages
    The construction manager must decide whether to build single family homes, apartments, or condominiums. Using the maximin criterion, which assumes the worst outcome, the manager should build single family homes because it has the highest worst-case profit of $70,000. Using the equally likely criterion, which averages the outcomes, the manager should build apartments as it has the highest average profit of $103,300. If the manager were optimistic and used the maximax criterion, which assumes the best outcome occurs, building condominiums would be chosen as it has the highest potential profit of $220,000.

    Original Description:

    Decision making in operation management

    Original Title

    Decision Making problem -1

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    The construction manager must decide whether to build single family homes, apartments, or condominiums. Using the maximin criterion, which assumes the worst outcome, the manager should build single family homes because it has the highest worst-case profit of $70,000. Using the equally likely criterion, which averages the outcomes, the manager should build apartments as it has the highest average profit of $103,300. If the manager were optimistic and used the maximax criterion, which assumes the best outcome occurs, building condominiums would be chosen as it has the highest potential profit of $220,000.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    132 views3 pages

    Practice Problems: Decision Making

    Uploaded by

    Samar Abdel Rahman
    The construction manager must decide whether to build single family homes, apartments, or condominiums. Using the maximin criterion, which assumes the worst outcome, the manager should build single family homes because it has the highest worst-case profit of $70,000. Using the equally likely criterion, which averages the outcomes, the manager should build apartments as it has the highest average profit of $103,300. If the manager were optimistic and used the maximax criterion, which assumes the best outcome occurs, building condominiums would be chosen as it has the highest potential profit of $220,000.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Practice Problems: Decision Making

    Problem:
    Bascomb’s Candy is considering the introduction of a new line of products. In order to produce the
    new line, the bakery is considering either a major or minor renovation of the current plant. The
    market for the new line of products could be either favorable or unfavorable. Bascomb’s Candy has
    the option of not developing the new product line at all.
    With major renovation, at Bascomb’s Candy the payoff from a favorable market is $100,000, from
    an unfavorable market $  90,000 . Minor renovations and favorable market has a payoff of $40,000
    and an unfavorable market $  20,000 . Assuming that a favorable market and an unfavorable
    market are equally likely, Construct and solve the decision tree.

    1
    ANSWERS

    Problem:

    Problem 2:

    Therefore, the appropriate choice under equally likely market conditions is to make the minor
    modifications ( EMV  $10,000.)

    2
    Problem:
    The construction manager for Acme Construction, Inc. must decide whether to build single family
    homes, apartments, or condominiums. This is not a product-mix problem, but an all-or-nothing
    decision. He will hire workers and rent equipment appropriate for one action only. He estimates
    annual profits (in thousands of dollars) will vary with population trends as follows:

    Population grows Population grows


    Construction type Population steady slowly rapidly
    Single family $100 $90 $70
    Apartments 50 170 90
    Condominiums -20 100 220

    a. If he uses the maximin criterion, which type of Construction will he choose to build?
    b. If he uses the equally likely criterion, which kind of Construction will he choose to build?
    c. If the construction manager were an optimist, what criterion would he choose? What would
    be the choice of Construction for that criterion?

    Answer:
    (a) The pessimistic maximin criterion assumes the worst state of nature will occur and selects the
    action associated with the best of these worst outcomes. For this problem, the "worsts" for each
    action are Single family = $70, Apartments = $50, and Condominiums = -20. The best of the worsts
    is $70, so the manager should choose to build single family homes.
    (b) The equally likely criterion calculates the simple average of each action; the results are Single
    family = $86.7, Apartments = $103.3, and Condominiums = $100. The manager should select the
    action associated with the largest of these values, and build apartments.
    (c) The optimistic criterion is maximax, which assumes that the best outcome will occur for each
    action. The best outcomes are Single family = $100, Apartments = $170, and Condominiums =
    $220. The manager chooses the action associated with the best of the bests, or Condominiums.

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