Question

c) Suppose that if a measurable amount of rain falls during the next 24 hours, a river will reach floods stage and a business wil in cur damages of 300,000 pounds if a product line is not shutdown, but the damages will be reduced to 3,000 pounds if the product line is shutdown in advance. The product line can make a profit of 20,000 pounds per day when it runs normally. The National Weather Services has indicated that there is a 5% chance of a mea- surable amount of rain during the next 24 hours. The manager needs to decide whether the product line should be shutdown. (i) Draw a decision tree. ii) Which decision would the manager make based on the mini max criterion? ii) Which decision would the manager make based on expected- value decisions? 25 marks Turn overl

Answer 1

Probability of having measurable rainfall in next 24hrs = Pr[X] = 0.05

Thus, Probability of NOT having measurable rainfall in next 24hrs = 1 - Pr[X] = 0.95

Decion to a made: wuturtou deuon d line er mot Shuk down produ line NNo Ves Rain Otuns? Roin Ocuwu? Yes No yex No lobA 3,000 osN-3,00,0: 20,000 ) Baned on mini-mOX outeion monar il huurdovon u produ 다 Jung un odvanu anh ta doing dowi urnu un () Expede valu it Produ Probabaliy Ea munurobe ain(-3000)-)() no 0.05+-3,00,ooo) (o.95)20000pra:4aro unas mus, managerul chon not to souhdown produ uliwinadbou