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Good afternoon sir. I hope you are doing great.After watching your lecture on ch8 of the notes i tried to solve the question mackerel contracting and the answer given by acca caused me some trouble. The matrices in the model answer doesnt multiply the profit figures into their respective probabilites which you have done in your lecture on ch8. The matrices has absolute profit figures and then in the end has expected values, so i was just confused on when to use the probabilities and multiply them with the profit figures. And Sir will there be more revision lectures uploaded before 4th of june? Thank you.
The first thing to do in all of these types of question is to work out the pay-off table which is the matrix of profits or losses that van be made under each permutation of events. Here the matrix is composed of three different packages and three differrent demands.
PROBABILITIES ARE NOT USED AT THIS STAGE.
The pay-off profit table is shown at the top of P17 of the ACCA answer.
When you are doing maximin, maximax, minimax regret, probabilities are still not used because these approaches are used when the probabilities are not known
The only time you use probabilities is when you want to work out expected values where you weight each outcome with the probability of it occurring.
So if you had decided to make package 1, the expected value depends on the probability of each demand occurring: 85/10/5 and the expected value is:
4557302 x 0.85 + 683953 x 0.10 + 9114604 x 0.05 = 5013032
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