Kestrel Bikes Ltd: decisions under risk and uncertainty

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Plan 1: 0.2 x 60 + 0.5 x 90 + 0.3 x 100 = 12 + 45 + 30 = $87,000.
• Plan 2: 0.2 x 20 + 0.5 x 110 + 0.3 x 160 = 4 + 55 + 48 = $107,000.
• Plan 3: 0.2 x (-50) + 0.5 x 80 + 0.3 x 240 = -10 + 40 + 72 = $102,000.
• Plan 2 has the highest expected value.
• Each probability is applied to the correct payoff.
• The conclusion is stated, with the unit of $000 clear.

Marks counted: 0 of 6

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Maximin: the worst results are 60, 20 and -50, so Plan 1 is chosen. It suits a cautious decision maker.
• Maximax: the best results are 100, 160 and 240, so Plan 3 is chosen. It suits an optimist.
• Regret table: for low demand the best is 60, so regrets are 0, 40 and 110. For medium demand the best is 110, so regrets are 20, 0 and 30. For high demand the best is 240, so regrets are 140, 80 and 0.
• The largest regrets are 140 for Plan 1, 80 for Plan 2 and 110 for Plan 3, so Plan 2 is chosen under minimax regret.
• Minimax regret suits a decision maker who wants to avoid the feeling of having chosen the wrong plan.
• The three rules give different answers, which shows that the choice depends on attitude to risk.
• Each rule is named and applied with working shown.
• The explanation of risk attitude is given for each rule.

Marks counted: 0 of 8

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• With perfect information the best plan is chosen in each state: 60 for low, 110 for medium and 240 for high.
• EV with perfect information = 0.2 x 60 + 0.5 x 110 + 0.3 x 240 = 12 + 55 + 72 = $139,000.
• EVPI = 139,000 - 107,000 = $32,000.
• The fee of $45,000 is more than the EVPI, so the forecast should not be bought, because even a perfect forecast is worth less than it costs.

Marks counted: 0 of 4

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Expected value is an average that may not happen, and it ignores the spread of results. Plan 3 has a possible loss of $50,000.
• The probabilities are estimates by the marketing team and may be wrong.
• Other factors: the funding of the new hall, the effect on staff and suppliers, and the chance of a competitor entering the market.

Marks counted: 0 of 2