Case Study: Decision Making - Decision Trees Willard Gayle, a prominent businessman from Mandeville, is considering buying a new pickup truck for his Lawn Service Company. The economy in the town seems to be growing, and he is wondering whether he should choose a subcompact truck, compact truck or full-size pickup truck. The smaller truck would have better fuel economy but would sacrifice capacity and some durability. A friend from the Bureau of Standards Jamaica (BSJ) told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Mr. Gayle has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. REQUIRED: Develop a decision tree for this situation and indicate which type of truck he should select. States of Nature Options Lower gas prices Gas prices unchanged Higher gas prices Probability 0.3 0.5 0.2 Subcompact 16,000 19,000 21,000 Compact 15,000 20,000 22,000 Full size 24,000 19,000 6,000 a. Draw the decision tree. b. What is the EMV of each decision alternative? c. Which action should be selected? Justify your response.
Case Study: Decision Making - Decision Trees
Willard Gayle, a prominent businessman from Mandeville, is considering buying a new pickup truck for his Lawn Service Company. The economy in the town seems to be growing, and he is wondering whether he should choose a subcompact truck, compact truck or full-size pickup truck. The smaller truck would have better fuel economy but would sacrifice capacity and some durability. A friend from the Bureau of Standards Jamaica (BSJ) told him that there is a
30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices and a 50% chance that gas prices will stay roughly unchanged.
Based on this information, Mr. Gayle has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.
REQUIRED:
Develop a decision tree for this situation and indicate which type of truck he should select.
|
|
States of Nature |
||
|
Options |
Lower gas prices |
Gas prices unchanged |
Higher gas prices |
|
Probability |
0.3 |
0.5 |
0.2 |
|
Subcompact |
16,000 |
19,000 |
21,000 |
|
Compact |
15,000 |
20,000 |
22,000 |
|
Full size |
24,000 |
19,000 |
6,000 |
a. Draw the decision tree.
b. What is the EMV of each decision alternative?
c. Which action should be selected? Justify your response.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
