QTY 1012 Quantitative Analysis Assignment Solution for Students

 

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Assignment Questions:

Every day we decide. However, it is important that before making decisions, we need to collect information and consider the situation and the environment. In the same manner, a firm needs to make many decisions. Making good decisions would in the end make the firm profitable and enable it to function smoothly and effectively. Assume that you are the manager, you are required to make a good decision based on the activity below:

SCENARIO 1

Cal Bender and Becky Addison have known each other since high school. Two years ago, they entered the same university and today they are taking undergraduate courses in business school. Both hope to graduate with degrees in finance. In an attempt to make extra money and to use some of the knowledge gained from their business courses, Cal and Becky have decided to look into the possibility of starting a small company that would provide word processing services to students who needed term papers or other reports prepared in a professional manner.

Using a systems approach, Cal and Becky have identified three strategies. Strategy 1 is to invest in an expensive microcomputer system with a high-quality laser printer. In a favorable market, they should be able to obtain a net profit of $10,000 over the next two years. If the market is unfavorable, it can lose $8,000. Strategy 2 is to purchase a less expensive system. With a favorable market, they could get a return during the next two years of $8,000. With an unfavorable market, they would incur a loss of $4,000. Their final strategy, strategy 3, is to do nothing. Cal is basically a risk-taker, whereas Becky tries to avoid risk.

• What type of decision procedure should Cal use? What would Cal’s decision be?

• What type of decision-maker is Becky? What decision would Becky make?

• If Cal and Becky were indifferent to risk, what type of decision approach should they use? What would you recommend if this were the case?

 

Also checkout: quantitative analysis for management decision questions and answers pdf

 

SCENARIO 2

Monica Britt has enjoyed sailing small boats since she was 7 years old, when her mother started sailing with her. Today, Monica is considering the possibility of starting a company to produce small sailboats for the recreational market. Unlike other mass-produced sailboats, however, these boats will be made specifically for children between the ages of 10 and 15. The boats will be of the highest quality and extremely stable, and the sail size will be reduced to prevent problems of capsizing.

Her basic decision is whether to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favorable market, Monica can expect to make $90,000 from the large facility or $60,000 from the smaller facility. If the market is unfavorable, however, Monica estimates that she would lose $30,000 with a large facility, and she would lose only $20,000 with the small facility.

Because of the expense involved in developing the initial molds and acquiring the necessary equipment to produce fiberglass sailboats for young children, Monica has decided to conduct a pilot study to make sure that the market for the sailboats will be adequate. She estimates that the pilot study will cost her $10,000.

Furthermore, the pilot study can be either favorable or unfavorable. Monica estimates that the probability of a favorable market given a favorable pilot study is 0.8. The probability of an unfavorable market given an unfavorable pilot study result is estimated to be 0.9. Monica feels that there is a 0.65 chance that the pilot study will be favorable. Of course, Monica could bypass the pilot study and simply make the decision as to whether to build a large plant, small plant, or no facility at all. Without doing any testing in a pilot study, she estimates that the probability of a favorable market is 0.6. What do you recommend? Compute the EVPI.

Solution:

Before Monica starts to solve this problem, she should develop a decision tree that shows all alternatives, states of nature, probability values, and economic consequences.

 

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