Hi Tutor,
In this type of question where we have to do the maximin,maximax ,Minimax regret,and the expected values.
here it is very important to identify the uncertain factor .
So based on the question information can you please explain me the approach for choosing the uncertain factor in this question .
Thanks,
Cement Co is a company specialising in the manufacture of cement, a product used in the building industry. The
company has found that when weather conditions are good, the demand for cement increases since more building
work is able to take place. Cement Co is now trying to work out the level of cement production for the coming year
in order to maximise profits. The company has received the following estimates about the probable weather conditions
and corresponding demand levels for the coming year:
Weather Probability Demand
Good 25% 350,000 bags
Average 45% 280,000 bags
Poor 30% 200,000 bags
Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed
of at a cost of $0·50 per bag. Cement Co has decided to produce at one of the three levels of production to match
forecast demand. It now has to decide which level of cement production to select.
Required:
(a) Construct a pay-off table to show all the possible profit outcomes. (8 marks)
(b) Determine the level of cement production the company should choose, based on the decision rule of
maximin. Show your calculations clearly and justify your decision.
Ask the Tutor ACCA PM
choosing the uncertain factor
Hi
Specially when making the regret table what will be the base which we have to list the outcomes,
a little bit confusing,
can help please ,
Thanks
2y ago#2First thing you do is the payoff table - this is supposed to show all possible profit outcomes for demand of 350k , 280k and 200 k bags
You get $5 cont for everyone sold and a loss of $4.50 for disposal per bag
Your table will have demand and supply for these quantities
xxxxxxxxxxxxxxxxx supply 350 xxxxxxxxxxx 280 xxxxxxxxxxxx 200
demand
350
280
200
You then fill in the profit figures accordingly
When you have these figures you can soon establish the maximin - identify the worst outcomes and then find the highest and maximax - identify the best outcomes and then select the highest.
Then you insert probability to get ev
xxxxxxxxxx 350 xxxxxxxxxxx 280 xxxxxxxxxxxx 200
350 xxx 0.25
280 xxx 0.45
200 xxx 0.30
xxxxxxxxxxx ev 1 xxxxxxxxxxxxxxx ev 2 xxxxxxx e v 3
Whichever is the highest is the EV
You are not asked for the minimax regret with this question.
2y ago#3Minimax regret is
What do you regret about getting your decision wrong?
Have you watched John's fabulous videos on this topic?
Chapter 10
Risk and Uncertainty – Maximin (23m)
Risk and Uncertainty – Maximax (15m)
Risk and Uncertainty – Minimax regret, Expected values (29m)
Hi,
I watched all the uncertainty lectures but I have a big miss in identifying in each different questions the uncertain factor
and specially for regret table how to arrange table and from to start
for example here in this question
for making the regret
I must say If I choose the 200 units what will happen when the weather is good ,average ,or poor
and I should fill in the regret table like that
But I should not say the regret for the good weather what will be the units either 200,280,350
this what I want to be sure of
Thanks,
2y ago#5Minimax Regret
In this decision making rule the decision maker tries to minimises the regret from making the wrong decision. Regret refers to any opportunities lost as a result of making the wrong decision.
If supply and demand could be 40, 50, 60 or 70
When supply equals demand = good news but if it doesn't what could we regret?
If demand is 40 then what would you regret if supply was 50, 60 & 70
If demand is 50 then what would you regret if supply was 40, 60 & 70
and so on
Thanks a lot.
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