Downloadable - About University

174 Decision trees and influence diagrams
(c) The estimate that there is a 30% chance that a new government
in Slohemia will come to power and nationalize all foreign
assets has been disputed by a number of NMC’s managers.
Many think that the probability has been overestimated. Perform
a sensitivity analysis on this estimate and interpret your
result.
(10) A private college has to decide whether to conduct further market
research, before making a decision on whether to launch a new
training course for people in the computer industry. The track
record of the market research suggests that it is highly reliable, but
not perfectly accurate, in its indications.
If further market research is undertaken at a cost of $28 000 then it
has been calculated that this research will have a 0.56 probability of
indicating that student numbers will be high and a 0.44 probability
of indicating that they will be low. In the light of each indication,
the college would have to decide whether or not to launch the
course.
If the market research indicates high student numbers then there
is thought to be a 0.86 probability that actual student numbers
would turn out to be high if the course was launched, and a 0.14
probability that they would be low.
If market research indicates low student numbers then the college
might still decide to launch the course, despite this pessimistic
indication. In this case the probability of actual student numbers
turning out to be high would be only 0.14, while the probability of
student numbers turning out to be low would be 0.86.
If the college decides at the outset not to pay for further market
research then it will have to make a decision on whether or not
to launch the course on the basis of existing information about
the potential demand for the course. In this case, if the course is
launched, it is thought that there is a 0.6 probability of attracting
high student numbers and 0.4 probability that these numbers will
be low.
Launching the course would cost the college an estimated $60 000.
High student numbers would bring in a revenue of $120 000, while
low student numbers would generate a revenue of $40 000.
(a) Assuming that the college want to maximize expected profit
(i.e. revenue–costs), determine the policy they should adopt.
(b) Discuss the strengths and limitations of the approach to the
decision you adopted in part (a) from the perspective of the
college’s managers.