Reference no: EM132205554

Exercise 1 (i) Construct a decision table for the following decision and evaluate the alternatives using the Maximax, Maximin, Equally Likely, and MinMax Regret criteria. Consider only the profits for the first year when building the decision table. Either a small or a large facility can be built. The neighborhood could have either few or many families when the facility is completed. If a small facility is built, and few families live in the neighborhood, annual profit is estimated to be $ 435,000 a year. If many families live in the neighborhood, the estimate is $ 675,000 a year. If a big facility is built, and many families live in the neighborhood, profit is estimated to be 845,000 a year. If few families live in the neighborhood, profit for a big facility is estimated to be $ 265,000 a year. (ii) An expert committee has estimated that the likelihood of few people returning to the neighborhood is 0.625. Use the expected value criterion to decide on the best alternative under risk. (iii) Determine the value of perfect information about the number of people moving back to town.

Exercise 2: A patient diagnosed with a disease can opt to not treat the disease, take medication, or have surgery done. Patients diagnosed with the disease have a 95% chance of actually having the disease. If the patient actually has the disease, life expectancy is 2 years without treatment, 8 years with medication, and with surgery there is a 98% of 20 years life and a 2% chance of death due to complications. If the patient actually does not have the disease, life expectancy is 20 years without treatment, 19 years with medication, and with surgery there is a 96% of 18 years life and a 4% chance of death due to complications. Set up the decision tree and make a recommendation.

Exercise 3: An insurance plan has 5000 members. A vaccine can be administered before the start of the flu season in September to all plan members. The cost of administering the flu vaccine in September is $28 per member. There is a 4 % chance of a flu outbreak.

(I) If the vaccine is administered in September and there is a flu outbreak, 1.5% of the members will require in-patient treatment costing 10,000 each, while 6% of the members will require out-patient treatment costing $ 300 each.

(II) If the vaccine is administered in September and there is no flu outbreak, .02 % of the members will require in-patient treatment costing $ 10,000 each and 1.5% will require out-patient treatment costing $ 300 each.

(III) If the vaccine is not administered in September, and there is no flu outbreak, .02 % of the members will require in-patient treatment and 1% will require out-patient treatment costing the same amount as in the case of an outbreak.

(IV) If the vaccine is not administered in September and there a flu outbreak, there is an option to start the vaccination program in January. The cost of the vaccination program in January is $38 per member.

(V) If the program is conducted in January, 2.5% of the members will require in-patient treatment costing $ 10,000 each, while 7% of the members will require out-patient treatment costing $ 300 each.

(VI) If the program is not offered in January, 6% of the members will require in-patient treatment costing $ 10,000 each, while 12% of the members will require out-patient treatment costing $ 300 each.

Sketch the decision tree and determine the most cost-effective decision.