Problem: Use the following data set and assumptions to create payoff and regret matrices in order to answer questions 1 and 2.
Alternative A Alternative B
Present value of costs incurred for selecting the alternative $10.1 $20.6
prior to knowing which state of nature actually occurs
Present value of future revenues if the state of nature that $81.0 $134.1
actually occurs favors the selected alternative
Present value of future recoverable costs if the $7.9 $9.8
state of nature that actually occurs does not favor
the selected alternative
Note: All values shown in the preceding table are in millions of dollars.
Assume that there are four collectively exhaustive alternatives from which you must choose prior to knowing what state of nature will actually occur.
- Select alternative A
- Select alternative B
- Select both alternatives A and B
- Select neither alternative A nor alternative B
Assume that there are two collectively exhaustive states of nature that could occur.
- The state of nature that occurs favors alternative A.
- The state of nature that occurs favors alternative B.
Assume that the estimated costs associated with selecting a given alternative must be incurred prior to knowing which state of nature will actually occur.
1. Develop a payoff matrix for the preceding data.
2. Develop a regret matrix for the preceding data.