Greentrop Pharmaceutical Products is the world leader in the area of sleep aids. Its major product is "Dozealot." The Research-and-Development Division has defined two alternatives to improve the quality of the product. These alternatives are simple reformulations of the product to minimize the side effects and to improve the product efficacy. To conduct an analysis, management has decided to consider the possible demands for the drug under each alternative. The following payoff table shows the projected profit in millions of dollars.
?
Demand Decision Alternatives LowMediumHigh d1 $500 $350 $525 d2 $875 $300 $765?
a. Construct a decision tree for this problem.
b. If the decision maker knows nothing about the probabilities of three states of nature, what is the recommended decision using the optimistic, conservative, and minimax regret approaches?
What will be an ideal response?
a.
b.
Decision Alternatives | Maximum Profit | Minimum Profit |
d1 | $525 | $350 |
d2 | $875 | $300 |
Optimistic approach: select d2 which has the largest maximum profit.
Conservative approach: select d1 which has the largest minimum profit.
Regret or opportunity loss table:
Decision Alternatives | Demand | |||
Low | Medium | High | Maximum Regret | |
d1 | $375 | 0 | $240 | $375 |
d2 | 0 | $50 | 0 | $50 |
Minimax Regret: The decision alternative is d2 with the minimum of the maximum regret values of $50.
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