2. Decision Trees Sequential Decision-Making

3. A Farmer’s Decision Problem Weather probability.55.15 30 NormalDroughtRainy Plant soybeans$ 10512 Plant corn 7813 EMV 9.85 8.95 profit per acre

4. The Farmer’s Decision Tree plant soybeans plant corn 10 5 12 normal (.55) drought (.15) rainy (.30) 7 8 13 normal (.55) drought (.15) rainy (.30) EMV: 9.85 EMV: 8.95

5. Sequential Decision Introduce product, set price do not introduce 0 introduce no competitor (.2) high500 medium300 low100 competitor (.8) high high (.3)150 medium (.5) 0 low (.2) -200 medium high (.1)250 medium (.6) 100 low (.3) -50 low high (.1)100 medium (.2) 50 low (.7) -100 EMV: 0 EMV: 500 EMV: 5 EMV: 70 EMV: -50 EMV: 70 EMV: 156

6. A Bigger Decision Tree A manufacturing company, faced with a possible increase in demand for its product, has the option of buying and installing an additional production unit (at a cost of $80,000) or putting its employees on overtime (at a yearly cost of $52,000). Marketing estimates there is a 60% chance sales would increase (by 20%) and a 40% chance sales would decrease (by 5%). Due to the lead time required to order and install new equipment, a decision has to be made now. Profit if sales riseprofit if sales drop purchase new equipment$ 460,000$ 340,000 overtime 440,000 380,000

7. The Company’s 1 yr Decision Tree new equipment - 80,000 overtime -52,000 460,000 340,000 sales rise (.60) sales fall (.40) 440,000 380,000 sales rise (.60) sales fall (.40) 412,000 416,000 332,000 364,000

8. The Company’s 2 yr Decision Tree Marketing says: If first yr:increase decrease 2nd yr high sales.5.8 moderate.5.2 The first year decision remain the same. However, for the second year, the company could purchase two machines (if the first was not bought in year 1), buy a second machine, initiate overtime, or keep status quo. “overtime!”“new equipment!” Management Decision-Making in Action

9. new equipment - 80,000 sales rise (.60) sales fall (.40) 812,000 994,000 972,000 942,000 890,000 810,000 996,000 948,000 high (.5) medium (.5) new equip (2) -80,000 1,012,000 976,000 high (.5) medium (.5) overtime -52,000 820,000 780,000 high (.8) medium (.2) status que

10. overtime -52,000 sales rise (.60) sales fall (.40) 834,000 782,000 912,000 931,000 799,000 792,270 740,270 new equip (2 mach) -160,000 new equip (1 mach) plus overtime - 132,000 overtime -52,000 840,000 810,000 high (.8) medium (.2) 936,000 888,000 high (.5) medium (.5) 952,000 910,000 high (.5) medium (.5) These decision trees will surely get me promoted!