Determine the optimal choices under the maximin

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Reference no: EM133386291

Quantitative Analysis in Health Services

Case Analysis - Decision Making

Ahospitalexecutive needs to address structural issues at one of the system's outpatient centers.There are four possible courses of action: (1) a new center, (2) major structural renovation, (3) moderate renovation, and (4) minor renovation. Further, weather conditions could affect construction costs. The probability of good weather is 0.40, moderate weather with rain has a probability of 0.35, and bad weather has a probability of 0.25.

Assuming good weather, option (1) will cost $215,000, option (2) will cost $120,000, option (3) will cost $90,000, and option (4) will cost $56,000. If moderate weather materializes, the costs will be $255,000 for option (1), $145,500 for (2), $98,000 for (3), and $75,000 for (4). Under bad weather, the costs will be $316,000 for option (1), $214,000 for (2), $123,000 for (3), and $119,000 for (4).

Complete each task below and document any supporting calculations. You can either submit your answers either in an electronic form or a scanned copy of a hand-written solution.

a. Build a payoff table.

b. Draw a decision tree for this problem. (Show cost outcomes, probabilities, and expectedvalue for each event node. Also be sure to use the proper symbols for each node.)

c. Using expected values, which alternative should be chosen?

d. Determine the optimal choices under the maximin, maximax, and minimax regret approaches.

e. The hospital board is especially weary of negative cost surprises, so you decide to perform a sensitivity analysis with more pessimistic weather probabilities: Pr(good weather) = 0.20; Pr(moderate weather) = .45; Pr(bad weather) = .35. Does this change the optimal choice?

Reference no: EM133386291

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