Reference no: EM131130417

Martin's Snowplowing Business Dilemma

Martin's service station is considering entering the snowplowing business in Freeport, Maine.  Martin can purchase either a snowplow blade attachment for the station's pick-up truck or a new heavy-duty snowplow truck.  Martin has analyzed the situation and believes that either alternative would be a profitable investment if the snowfall is heavy.  Smaller profits would result if the snowfall is moderate and losses would result if the snowfall is light. 

State of Nature

DECISION                                         HEAVY                                  MODERATE                          LIGHT           

Alternative                                          Snowfall, s1                            Snowfall, s2                            Snowfall, s3

Blade Attachment                               3500                                        1000                                        -1500

New Snowplow                                  7000                                        2000                                        -9000              

1.      If the decision maker knows nothing about the probabilities of the three states of nature, specify the best alternative using Optimistic, Conservative, and Minimax Regret decision making approaches.

Ø  The probabilities for the states of nature are P(s1)=0.40, P(s2)=0.30, and P(s3) = 0.30.

2.      Draw a Decision Tree.  Solve the Tree Diagram to specify the best decision alternative.

3.      What is the optimal decision strategy if perfect information were available?

4.      What is the expected value of perfect information? (EVPI)?

Ø  Suppose that Martin decides to wait until March before making a final decision.  The probabilities are given below:

P(Normal March or N) = 0.80 P(Unseasonably Cold or U) = 0.20

P(s1\N) = 0.35                                     P(s1\U) = 0.62

P(s2\N) = 0.30                                     P(s2\U) = 0.31

P(s3\N) = 0.35                                     P(s3\U) = 0.07

5.      What is the recommended decision (Wait until March or Don't Wait until March)?

6.      Do some research and give at least two real world examples of companies who use decision analysis/theory.  Write a paragraph explaining how these companies benefit by using such techniques.