2-1. Desmond Taylor is considering investing some money that he inherited. The following payoff table gives the profits that would be realized during the next year for each of three investment alternatives being considered:
STATE OF Nature
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(a). What decision would maximize expected profit?
(b). What is the maximum amount that should be paid for a perfect forecast of the economy?
2-2. Suppose that Desmond wants to make investment decision between bonds and stocks only. Conduct sensitivity analysis to help this person. Draw an appropriate picture to support your responses.
2-3. ABC Farm, Inc., produces cases of perishable food products. Each case contains an assortment of vegetables and other farm products. Each case costs $5 and sells for $15. If there are any cases not sold by the end of the day, they are sold to a large food processing company for $4 a case. The probability that daily demand will be 100 cases is 0.3, the probability that the demand will be 200 cases is 0.4, and the probability that daily demand will be 300 cases is 0.3.
ABC has a policy of always satisfying customer demands. If its own supply of cases is less than the demand, it buys the necessary vegetables from a competitor. The estimated cost of doing this is $16 per case.
(a). Draw a decision table for this problem.
(b). What do you recommend?
(c). Suppose that you have reason to believe the probabilities may not be reliable due to changing conditions. If these probabilities are ignored, what decision would be made using:
(i) the optimistic criterion?
(ii) the pessimistic criterion?
Finally, on a separate document, please explain how each was computed
QM excel add in should be used to respond to each question. I have listed a link below for the QM excel if you don’t have it
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