MGMT20005 Business Decision Analysis Assignment 1: Individual Assignment

Question 1:
The global airline industry will continue to lose income because of coronavirus pandemic for a
long time. Research analysts of a country offered three options to the government to consider when
offering wider economic benefit to the airline industry. The main purpose is not allowing airlines
with greater connectivity to fail as that will be an important driver of the post-crisis recovery. The
three options are: 1) let the struggling private airlines fall, 2) offer the airlines liquidity and 3)
nationalise the airlines. The research study provides the economic benefits (in million dollars) to
be allocated by the government for each option based upon three types of severity in pandemic
spread: light (s1), medium (s2) and high (s3) spread. The probabilities for the severity of pandemic
spread are P(s1)=0.3, P(s2)=0.3 and P(s3)=0.4

a. Construct a payoff table for this problem. [4 marks]
b. What is the optimal strategic option for the government with the optimistic approach?
[2 marks]
c. What is the optimal strategic option for the government with conservative approach?
[2 marks]
d. What is the optimal strategic option for the government with the opportunity loss
approach? [4 marks]
e. What is the optimal strategic option for the government if the decision is based on the
expected value criterion?

Question 2:
Belvedere Aged Care is currently facing a shortage of employees to serve the residents’
requirements with the challenges forced by COVID -19 virus. The management is considering
three options to fill the shortage: continuing with its own staff with increased salaries, hiring casual
employees from an agency or using a combination of own staff with increased salaries and casual
employees. The operational cost depends on future demand from the residents which are also
subject to the state restrictions of pandemic control. The following payoff table shows the cost for
each staffing option (in thousands of dollars) as follows.

Demand probabilities are P(s1)=0.3, P(s2)=0.5 and P(s3)=0.2
a. Use a decision tree to recommend a decision according to the EMV criterion. [7 marks]
b. Use EVPI to determine whether Belvedere Aged Care should attempt to obtain a better
estimate of demand. [6 marks]
c. A market survey indicates that the potential demand for additional staff is expected to report
either a favourable (F) or unfavourable (U) conditions. The relevant conditional probabilities
are as follows:
P(F|s1)=0.5, P(U|s1)=0.5, P(F|s2)=0.6, P(U|s2)=0.4, P(F|s3)=0.4, P(U|s3)=0.6.
What is the probability that the market survey report will be favourable? [5 marks]
d. What is Belvedere Aged Care’s optimal decision strategy as per the market survey report in
question (c)? [10 marks]
e. What is the expected value of the market research information in question (c)? [5 marks]

Question 3:
Part 1
A decision maker who is considered to be a risk taker is faced with this set of probabilities and
payoffs.
State of Nature
Decision s1 s2 s3
d1 5 10 20
d2 -25 0 50
d3 -50 -10 80
Probability 0.30 0.35 0.35

For the lottery p(80) + (1 – p)(-50), this decision maker has assessed the following indifference
probabilities:
Payoff Probability
50 0.60
20 0.35
10 0.25
5 0.22
0 0.20
-10 0.18
-25 0.10
Rank the decision alternatives on the basis of expected value (EV) and on the basis of expected
utility (EU). [6 marks]
Part 2
Giada Oliver, a very famous dessert chef is considering either opening another restaurant in New
South Wales or expanding the existing restaurant. The payoff table for these two options under
different demands: low (s1), medium (s2) and high (s3) is as follows:
State of Nature
Option s1 s2 s3
New restaurant -$80,000 $20,000 $160,000
Expand -$40,000 $20,000 $100,000
Giada has calculated the indifference probability for the lottery having a payoff of $160,000 with
probability p and -$80,000 with probability (1 – p) as follows:
Amount Indifference Probability (p)
-$ 40,000 0.4
$20,000 0.7
$100,000 0.9
a. Is Giada a risk avoider, a risk taker, or risk neutral? [1 mark]
b. Suppose Giada has defined the utility of -$80,000 to be 0 and the utility of $160,000 to be 80.
What would be the utility values for -$40,000, $20,000, and $100,000 based on the
indifference probabilities? [ 3 marks]
c. Suppose P(s1) = 0.4, P(s2) = 0.3, and P(s3) = 0.3. Which decision should Giada make? Compare
with the decision using the expected value (EV) approach. [4 marks]
Question 4:
Yevon Diamond, an engineer of Nations’ Construction Company, claims to have injured his back
by slipping off on the covered but damaged floorboards at Rema shopping complex building in

New York during his supervision. He filed a lawsuit against Bodhi Regan, the owner of Rema
shopping complex, asking for damages of $2 million. Yevon claims that the floorboards were
unsafely covered and that his fall could have prevented if Mr. Regan had properly informed
Nations’ Construction Company about the damaged floor. Mr. Regan notified his insurance
company, Laugh Insurance of the lawsuit. Laugh Insurance must defend Mr. Regan and decide on
actions to be taken regarding the lawsuit.
Some testimonies and a series of negotiations took place between both parties. As a result, Yevon
Diamond offered to accept a settlement of $1 million. Thus, one option is for Laugh Insurance to
pay Yevon $1 million to settle the claim. Laugh Insurance is also considering making Yevon a
counteroffer of $0.6 million in the hope that he will accept a lesser amount to avoid the time and
cost of going to trial. Laugh Insurance’s preliminary investigation shows that Yevon’s case is
strong; Laugh is concerned that Yevon may reject its counteroffer and request a jury trial. Laugh’s
lawyers spent some time exploring Yevon’s likely reaction if they make a counteroffer of $0.6
million.
The lawyer concluded that it is adequate to consider three possible outcomes to represent Yevon’s
possible reaction to a counteroffer of $0.6 million: (1) Yevon will accept the counteroffer and the
case will be closed; (2) Yevon will reject the counteroffer and elect to have a jury decide the
settlement amount; (3) Yevon will make a counteroffer to Laugh of $0.8 million. If Yevon does
make a counteroffer, Laugh decided that it will not make additional counteroffers. It will either
accept Yevon’s counteroffer of $0.8 million or go to trial.
If the case goes to a jury trial, Laugh considers three outcomes possible: (1) the jury may reject
Yevon’s claim and Laugh will not be required to pay any damages; (2) the jury will find in favour
of Yevon and award him $1 million in damages; or (3) the jury will conclude that Yevon has a
strong case and award him the full amount of $2 million.
Key considerations as Laugh develops its strategy for disposing of the case are the probabilities
associated with Yevon’s response to a Laugh counteroffer of $0.6 million and the probabilities
associated with the three possible trial outcomes. Laugh’s lawyers believe that the probability that
Yevon will accept a counteroffer of $0.6 million is 0.2. The probability that Yevon will reject a
counteroffer of $0.6 million is 0.3, and the probability that Yevon will himself, make a
counteroffer to Laugh of $0.8 million is 0.5. If the case goes to court, Laugh believes that the
probability that the jury will award Yevon damages of $2 million is 0.3, the probability that the
jury will award Yevon damages of $1 million is 0.5, and the probability that the jury will award
Yevon nothing is 0.2.
Perform an analysis of the problem facing Laugh and summarises your findings and
recommendations by including the following items:
a. A decision tree that shows the logical sequence of the decision problem. [14 marks]
b. A recommendation regarding whether Laugh should accept Yevon’s initial offer to settle the
claim for $1 million. [7 marks]
c. A decision strategy that Laugh should follow if it decides to make Yevon a counteroffer of
$0.6 million. [10 marks]
d. A risk profile for your recommended strategy. [8 marks]