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CSE5DSS Decision Support Systems

tag 0 Download 7 Pages / 1,537 Words tag 21-10-2020
  • Course Code: CSE5DSS
  • University: La Trobe University
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  • Country: Australia

Question:

Decision analysis using decision tables
 
Ilya and Gregor are friends who recently completed studies in IT and business respectively. They are considering starting a part-time consultancy business. To get started they need to rent some office space; however, office space is relatively expensive, and this could affect the success of their venture.
 
They have identified three different strategies for selecting an office. Strategy 1 is to rent a fairly expensive office in a location in close proximity to the business district where many of their potential customers are located. Although the office space is expensive, in a favourable market they would expect to attract a lot of business and hence make a good profit; however in an unfavourable market, they may not attract sufficient business to cover the cost in rent, and therefore lose money.
 
They estimate that in a favourable market, they would be able to obtain a net profit of $20,000 over the next two years; but if the market was unfavourable, they could lose $16,000. Strategy 2 is to rent a less expensive office in a neighbouring suburb. They estimate that under a favourable market they could get a return of $15,000, but in an unfavourable market would lose $6,000.
 
The third strategy is to do nothing; i.e., not set up the business. Ilya and Gregor have very different approaches when it comes to risk. Whereas Ilya tends to be optimistic and likes to take risks, Gregor is much more conservative, and averse to risk-taking.They estimate that there is a 55% chance that the market is favourable, and therefore a 45% chance that it is unfavourable.
 
Provide answers, with justifications, for each of the following questions:
 
a. What would Ilya’s decision be? Why?
b. What would Gregor’s decision be? Why?
c. What would their decision be if they were to choose the alternative with the greatest expected value? Show all calculations and justify your answer.Ilya and Gregor now believe that the probability of a favourable market is not 55%.
d. Construct a plot showing how the expected value of the returns for Strategy 1 and Strategy 2 vary with the value of P (for 0 ≤ P ≤ 1), where P is the probability of a favourable market.
e. Find the range of values for P for which the following decisions would be made
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