Expected Value and Uncertainty

MANAGEMENT                                                                             NAME _________________

COURSE 3233

EXPECTED VALUE AND UNCERTANTY

Problem 1:  Expected Value

Determine whether you would decide, based on profitability, to go with the product cluster of Product A, Product B, and Product C or the product cluster of Product X, Product Y, and Product Z.

Product A is expecting revenues of $800,000 and costs of $300,000.

Product B is expecting revenues of $600,000 and costs of $150,000.

Product C is expecting revenues of $700,000 and costs of $305,000.

The probability of achieving these revenues and costs are 28% for Product A and 34% for Product C?

Product X is expecting revenues of $700,000 and costs of $300,000.

Product Y is expecting revenues of $650,000 and costs of $250,000.

Product Z is expecting revenues of $800,000 and costs of $425,000.

The probability of achieving these revenues and costs are 35% for Product X and 31% for Product Z?

Your goal is to maximize profits.  Which product cluster would you choose?

For any credit, you must show all your work.

ANSWER:

Problem 2:  Uncertainty

Uncertainty is when the outcomes are not certain and you are unable to estimate probabilities, but you use your psychological orientation to make decision.  If you are optimistic you would make a “maximax” choice.  If you are generally a pessimist, you would make a “maximin” choice.  You also can make a choice that minimizes your maximum “regret” or make a minimax choice.

Use the following information and determine what would be your three choices based on the three psychological orientations (maximax, maximin, and minimax).

Show all work.

Payoff Table

Maximax:  Optimistic                                     ANSWER:

Maximin:  Pessimistic                                     ANSWER:

Minimax:  Regret Matrix                                ANSWER: