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AD 616 UCI Enterprise Risk Analysis Video Tech Case Questions
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AD 616
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AD 616: Enterprise Risk Analytics
Assignment 5
What to submit?
Please submit (i) a word file explaining in detail your answers to each question (you can use screenshots of the
R to explain your answers) AND (ii) R file with a picture of the decision tree. For each question, make sure you
develop the model and present the simulation results – R file should be self-explanatory. The assessment of
your work will include both the accuracy and the clarity of your word file and the R File.
1. Video Tech is considering marketing one of two new video games for the coming Holiday season1:
Battle Pacific or Space Pirates. Battle Pacific is a unique game and appears to have no competition.
Estimated profits (in thousands of dollars) under high, medium, and low demand are as follows:
Battle Pacific
Profit
Probability
High
$1000
0.2
Demand
Medium
$700
0.5
Low
$300
0.3
Video Tech is optimistic about its Space Pirates game. However, the concern is that profitability will be
affected by a competitor’s introduction of a video game viewed as similar to Space Pirates. Estimated
profits (in thousands of dollars) with and without competition are as follows:
Space Pirates
With Competition
Profit
Probability
Space Pirates
Without
Competition
Profit
Probability
High
$800
0.3
Demand
Medium
$400
0.4
Low
$200
0.3
High
Demand
Medium
Low
$1600
0.5
$800
0.3
$400
0.2
For planning purposes, Video Tech believes there is a 0.6 probability that its competitor will produce a
new game similar to Space Pirates. Given this probability of competition, the director of planning
recommends marketing the Battle Pacific video game. Using expected value, what is your recommended
decision and what is the expected profit?
1This
problem is adapted from Camm et al., Essentials of Business Analytics, Chapter 12, pp. 586 – 587, Exercise 8, 2015, Cengage
Learning.
2. Reconsider the problem in Question 1. Suppose that the profits (in thousands of dollars) are
uncertain.
For Battle Pacific:
Page | 1
•
•
•
When demand is high, the profit is normally distributed with mean 1000 and standard deviation
100.
When demand is medium, the profit is normally distributed with mean 700 and standard
deviation 70.
When demand is low, the profit is normally distributed with mean 300 and standard deviation
30.
For Space Pirates with competition:
•
•
•
When demand is high, the profit is normally distributed with mean 800 and standard deviation
80.
When demand is medium, the profit is normally distributed with mean 400 and standard
deviation 40.
When demand is low, the profit is normally distributed with mean 200 and standard deviation
20.
For Space Pirates without competition:
•
•
•
When demand is high, the profit is normally distributed with mean 1600 and standard deviation
160.
When demand is medium, the profit is normally distributed with mean 800 and standard
deviation 80.
When demand is low, the profit is normally distributed with mean 400 and standard deviation
40.
Incorporate this information to your decision tree. What is the probability that the expected profit will
be less than $724.000?
3. A company must decide whether to manufacture a component part in its plant or purchase the
component part from a supplier. The resulting profit is dependent upon the demand for the product.
The following payoff table shows the projected profit (in thousands of dollars):
Decision Alternative
Manufacture,d1
Purchase, d2
Low Demand, s1
-20
10
State of Nature
Medium Demand,s2
40
45
High Demand,s3
100
70
The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30.
a. Use a decision tree to recommend a decision.
b. A test market study of the potential demand for the product is expected to report either a
favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as
follows:
P(F|s1) = 0.10 P(U|s1) =0.90
P(F|s2) = 0.40 P(U|s2) = 0.60
Page | 2
P(F|s3) = 0.60
P(U|s3) = 0.40
What is the probability that the market research report will be unfavorable?
c. What is the company’s optimal decision strategy?
d. What is the expected value of the market research information?
Page | 3
AD616 Individual Assignment 5
Yu Wang
Question 1
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This study source was downloaded by 100000765850527 from CourseHero.com on 06-10-2021 03:48:34 GMT -05:00
https://www.coursehero.com/file/68428063/AD616-Assignment5docx/
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Answer:
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Based on the decision tree shown below, I suggest the Video Tech do marketing on Space Pirates
as it is forecasted to have a higher Expected Monetary Value (EMV) with $724,000 compared to
the EMV of Battle Pacific $640,000.
This study source was downloaded by 100000765850527 from CourseHero.com on 06-10-2021 03:48:34 GMT -05:00
https://www.coursehero.com/file/68428063/AD616-Assignment5docx/
Question 2
Answer
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sh
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The probability that the expected profit will be less than $724.000 is 57.19%
This study source was downloaded by 100000765850527 from CourseHero.com on 06-10-2021 03:48:34 GMT -05:00
https://www.coursehero.com/file/68428063/AD616-Assignment5docx/
Question 3
a.
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Answer
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b.
sh
The EMV of purchasing from another is higher than it of manufacture, so I recommend the
company purchase the component from a supplier to earn more profit.
This study source was downloaded by 100000765850527 from CourseHero.com on 06-10-2021 03:48:34 GMT -05:00
https://www.coursehero.com/file/68428063/AD616-Assignment5docx/
The probability that the market research report will be unfavorable is 64.5%
c.
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Answer
This study source was downloaded by 100000765850527 from CourseHero.com on 06-10-2021 03:48:34 GMT -05:00
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After conducting the market research, the best strategy for the company is manufacturing the
component by themselves when the potential demand for the product is favorable, or purchasing
the component when the potential demand for the product is unfavorable.
d.
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the expected value of the market research information is $64.6k - $40.25k = $24,350
This study source was downloaded by 100000765850527 from CourseHero.com on 06-10-2021 03:48:34 GMT -05:00
https://www.coursehero.com/file/68428063/AD616-Assignment5docx/
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