SOLVED

11) What limitation(s) do decision trees overcome compared to decision tables? 12) A toy manufacturer makes stuffed kittens and puppies that have relatively lifelike motions. There are three different mechanisms which can be installed in these “pets.” These toys will sell for the same price regardless of the mechanism installed, but each mechanism has its own variable cost and setup cost. Profit, therefore, is dependent upon the choice of mechanism and upon the level of demand. The manufacturer has in hand a forecast of demand that suggests a 0.2 probability of light demand, a 0.45 probability of moderate demand, and a probability of 0.35 of heavy demand. Payoffs for each mechanism-demand combination appear in the table below. Demand Wind-up action Pneumatic action Electronic action Light $250,000 $90,000 -$100,000 Moderate 400,000 440,000 400,000 Heavy 650,000 740,000 780,000 Construct the appropriate decision tree to analyze this problem. Use standard symbols for the tree. Analyze the tree to select the optimal decision for the manufacturer. The best choice is Pneumatic, $475,000. 13) A local business owner is a bit uncertain of the demand forecast, and he is timidly approaching the capacity decision for a business he is about to open. Here’s how he describes the decisions that confront him over the next two years. “First, I have to choose between building a large plant initially and building a small one that has room to expand. Or I could rent now and decide whether to build next year. That one, too, could be the large version or the small. If I build small, then after one year, I can review how good business was, and decide whether to expand. If I build large, there is no further option to enlarge.” Do not concern yourself with probabilities or payoff values. Simply draw the tree that illustrates the manager’s decision alternatives and the chance events that go along with them. Use standard symbols for decision tree construction, and label all parts of your diagram carefully. To simplify, assume that business in the first year, and in the second, can be only “good” or “bad.”