CSE5DSS: Decision Support Systems - IT Assignment Help

Assignment Task:

Problem 1: Decision Making using Decision Tables

Fred and George are recent graduates who met while they were studying degrees in IT and business respectively. They are considering setting up a small tutoring agency to provide assistance to school students in subjects such as mathematics and accounting. Their biggest expense in setting up their agency is the cost of renting office space that they can use to deliver their tutoring services. 

In their search for a suitable office, they have come across two offices which would be suitable. One is fairly expensive but is located close to many schools, so it is likely they would have many students seeking their services. The other office is less expensive, but not so conveniently located. 

They have done some modelling, and have estimated that in a favourable market, renting the more expensive office would allow them to generate a net profit of $10,000 over two years; but if the market was unfavourable, they could lose $8,000. On the other hand, renting the less expensive office would generate a return of $7,000 over the two years if the market was favourable, but they would lose $2,000 in an unfavourable market. Since the overall economic outlook is positive, they have estimated that there is a 60% chance that the market will be favourable. 

They need to decide among the following three alternatives: 

Alternative A: Rent the more expensive office 

Alternative B: Rent the less expensive office 

Alternative C: Do nothing; i.e., don’t set up the business. 

Answer the following questions: 

a) Which alternative would be chosen under a maximax decision procedure? Explain how you arrived at this answer.

b) Which alternative would be chosen under a maximin decision procedure? Explain how you arrived at this answer. 

c) Given that George tends to be risk-averse, what would his decision be? Relate your answer to the answers you have given to the first two questions.

d) What would their decision be if they were to choose the alternative with the greatest expected value? Show all calculations, and justify your answer.

e) Construct a plot showing how the expected value of the returns for Strategy 1 and Strategy 2 varies with the value of P (for 0 ≤ P ≤ 1), where P is the probability of a favourable market.

f) Find the range of values for P for which the following decisions would be made.

You can estimate values from the plot in (e). 

i. Strategy 1

ii. Strategy 2

iii. Strategy 3

Fred and George know a person who claims to be able to predict with absolute certainty whether or not the market will be favourable, but he will only provide this information for a cost. 

g) Assuming that this person’s prediction is always correct, what is the maximum amount that Fred and George should be willing to pay for this information? You must explain your reasoning clearly.

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