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Expected Value and Loss Analysis

The next document contains probability distributions and expected losses for different actions under various states of nature. It determines that taking action for a state of nature of 55000 units should be chosen as it has the lowest expected loss. The following shows calculations of expected losses for different capacity levels and recommends releasing all 3 seats now for

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akashkr619
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291 views9 pages

Expected Value and Loss Analysis

The next document contains probability distributions and expected losses for different actions under various states of nature. It determines that taking action for a state of nature of 55000 units should be chosen as it has the lowest expected loss. The following shows calculations of expected losses for different capacity levels and recommends releasing all 3 seats now for

Uploaded by

akashkr619
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Outcome Frequency

x f p(x) x.p(x)
2 24 0.2823529 0.5647059
4 22 0.2588235 1.0352941
6 16 0.1882353 1.1294118
8 12 0.1411765 1.1294118
10 7 0.0823529 0.8235294
12 3 0.0352941 0.4235294
15 1 0.0117647 0.1764706
85 5.2823529 EXPECTED VALUE
x p(x) x.p(x)
8000 0.05 400
9000 0.15 1350
10000 0.25 2500
11000 0.3 3300
12000 0.2 2400
13000 0.05 650
1 10600 EXPECTED VALUE
x p(x) x.p(x)
0 0.35 0
50 0.25 12.5
100 0.15 15
150 0.1 15
200 0.08 16
250 0.05 12.5
300 0.02 6
1 77

SO JIM SHOULDN'T PAY $100 FOR MAINTENANCE


No. of Accidents Frequency
x f p(x) x.p(x)
0 1 0.0416667 0
2 1 0.0416667 0.0833333
3 1 0.0416667 0.125
4 2 0.0833333 0.3333333
6 1 0.0416667 0.25
7 3 0.125 0.875
8 5 0.2083333 1.6666667
9 2 0.0833333 0.75
10 5 0.2083333 2.0833333
12 2 0.0833333 1
14 1 0.0416667 0.5833333
24 7.75
MR OPSINE SHOULD RECOMMEND AN INSTALLATION
TRUCK DIVISION AIRLINE DIVISION
LETTERS LOST FREQUENCY LETTERS LOST FREQUENCY
x f p(x) x.p(x) x f p(x)
0 1 0.0833333 0 0 2 0.1666667
1 2 0.1666667 0.1666667 1 1 0.0833333
2 2 0.1666667 0.3333333 2 2 0.1666667
3 2 0.1666667 0.5 3 1 0.0833333
4 2 0.1666667 0.6666667 4 3 0.25
5 2 0.1666667 0.8333333 5 1 0.0833333
6 0 0 0 6 1 0.0833333
7 1 0.0833333 0.5833333 7 1 0.0833333
12 3.0833333 12

HE SHOULD INVESTIGATE AIRPLANE DIVISION.


x.p(x)
0
0.0833333
0.3333333
0.25
1
0.4166667
0.5
0.5833333
3.1666667
BUILDING A LOSS MATRIX

STATES OF NATURE
25000 40000 55000 70000
PROBABILITY 0.1 0.3 0.45 0.15
ACTION CP 0.25
25000 0 15000 30000 45000 SP 1.25
40000 3750 0 15000 30000 OVERSTOCK 0.25
55000 7500 3750 0 15000 UNDERSTOCK 1
70000 11250 7500 3750 0

E[LOSS] FOR 25000 E[LOSS] FOR 40000 E[LOSS] FOR 55000


x p(x) x.p(x) x p(x) x.p(x) x
0 0.1 0 3750 0.1 375 7500
15000 0.3 4500 0 0.3 0 3750
30000 0.45 13500 15000 0.45 6750 0
45000 0.15 6750 30000 0.15 4500 15000
24750 11625

SO 55000 SHOULD BE CHOOSEN


E[LOSS] FOR 55000 E[LOSS] FOR 70000
p(x) x.p(x) x p(x) x.p(x)
0.1 750 11250 0.1 1125
0.3 1125 7500 0.3 2250
0.45 0 3750 0.45 1687.5
0.15 2250 0 0.15 0
4125 5062.5
1 Revenue generated by releasing all 3 seats now
750

2 Expected net revenue if all 3 seats are released now


= 250*3 - 0.45*0 - 0.30*1*150 - 0.15*2*150 - 0.10*3*150
= 615

3 Expected net revenue if 2 seats are released now


=

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