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Universiti Teknologi Mara Melaka

QMT425
Tutorial 3

1. Pn Jamilah is opening another restaurant either in Plaza Wangi or Plaza Harum. She has done an
analysis on the potential return (RM000) of the new restaurant as shown in the table below;
Plaza Demand
High Moderate Low
Wangi 40 30 -5
Harum 35 20 5
Probability 0.25 0.5 0.25

She also considers hiring a sales expert to help her making decisions. The charge for the survey is RM
3,000. The sales expert predicts that there is a 0.7 probability that the survey conducted will show
positive result. The others estimated probability resulted from the survey is as follows;
P(High / Positive survey) = 0.4
P(Moderate / Positive survey) = 0.5
P(High / Negative survey) = 0.1
P(Moderate / Negative survey) = 0.3

a) Construct a complete decision tree and calculate all the EMV values.
b) What is the best decision to Pn. Jamilah?
c) How much should Pn. Jamilah pay for the survey?

2. Amir Sdn. Bhd. is considering whether to open a large or small electrical appliances shop in Melaka
city. The company manager has developed a table shows the estimated payoffs (RM000) for a future
store. The payoffs depend on the size of the store and the strength of demand.

High Demand Low Demand


Large store 55 -25
Small store 33 -5

The manager estimates that the probability of high demand is 0.5 and the probability of low demand is
also 0.5. The manager could request that a research firm conduct a survey (at a cost of RM 6,000) that
would better indicate future demand. The result of the survey can be either positive or negative. If the
result of the survey is positive and the demand is high, the probability is 0.89 while the probability for
the high demand given by the negative survey is 0.15. The probability that the result of survey will be
positive is 0.55.

a) Construct the decision tree and determine the best strategy for Amir Sdn. Bhd.?
b) What is the worth of the survey?
3. Zarif is opening another branch of his Zarif Deli Kiosk at RnR Tapah in the North-South
Expressway. Zarif can run the kiosk either for 24 hours per day or only 12 hours per day (from 8.00
am to 8.00 pm). He also considers hiring a sales expert to predict the potential demand for the new
branch. If the survey were conducted, the results would show either high demand or low demand for
the kiosk.

Zarif has also done some analysis on the potential return of the kiosk operation. If he runs 24 hours per
day, the expected return is RM90.000 if the market is favourable, but he will lose RM45.000 if the
market is unfavourable. If he run for 12 hours, the estimated profit will be RM50.000 in a favourable
market, and RM20.000 loss in an unfavourable market. Currently, he assumes the probability that the
market is favourable is 50%.

The sales expert will charge him RM8.000 for the survey. It is estimated that there is a 0.6 probability
that the survey will indicate high demand. Furthermore, there is a 0.7 probability that the market will
be favourable given a high demand from the survey. However, the sales expert warns him that there is
only 38% chance of favourable market if the survey shows low demand.

a) Construct a decision tree for Zarif. Analyze the tree and determine the best decision for
him.
b) Calculate the worth of the sales expert's advice.

4. Zarisa is opening another boutique either in Mall A or Mall B. The estimated return (RM 000) of
the two boutiques is shown in the table below:

Mall Demand
High Moderate Low
A 45 30 8
B 40 25 -8
Probability 0.3 0.5 0.2

She also considers hiring a sales expert to conduct a survey. The cost for the survey is RM3,000. The
sales expert predicts that there is a 0.2 probability that the survey conducted will show negative result.
The others estimated probability resulted from the survey is as follows:

P(High/Positive survey)= 0.35


P(Moderate/Positive survey) = 0.55
P(High/Negative survey) = 0.20
P(Moderate/Negative survey)= 0.30

a) Construct a decision tress and calculate all the EMV values.


b) What is your suggestion to Zarisa?
c) Compute the EVSI. Explain the value obtained.

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