Question:

The following payoff table shows profit for a decision analysis problem with two decision alternatives and three states of nature.

(a) Construct a decision tree for this problem.

(b) If the decision maker knows nothing about the probabilities of the three states of nature, what is the recommended decision using the optimistic, pessimistic and minimax regret approaches?

(c) Suppose that the decision maker has obtained the probability assessments: P(S1) =0:65, P(S2) = 0:15, and P(S3) = 0:20.

(1) Use the expected value approach to determine the optimal decision.

(2) What is the optimal decision strategy if perfect information were available?

(3) What is the expected value for the decision strategy developed in part (2)?

(4) Using the expected value approach, what is the recommended decision without perfect information? What is the expected value?

(5) What is the expected value of perfect information?