SHOW ALL CALCULATIONS TO SUPPORT YOUR ANSWERS. YOU MAY FOLLOW THE METHODS SHOWN IN THE MP4 ON DECISION ANALYSIS FOR A WAY TO DO PART (B) OF THIS QUESTION IF YOU WISH.

SHOW ALL CALCULATIONS TO SUPPORT YOUR ANSWERS. YOU MAY FOLLOW THE METHODS SHOWN IN THE MP4 ON DECISION ANALYSIS FOR A WAY TO DO PART (B) OF THIS QUESTION IF YOU WISH.

Show all calculations to support your answers. You may follow the methods shown in the mp4 on Decision Analysis for a way to do part (b) of this question if you wish.

20 marks – 10 for (a), 10 for (b).

a) People frequently use three heuristics to assess probabilities and to predict values. Identify and describe these heuristics and identify and explain a bias to which each of these heuristics lead.

b) Martha Jones is considering investing money in three alternative investments over a one-year period. Below are the expected profits from each investment given assumptions about the state of the economy:

Decision Alternative Good Economy Poor Economy
Stock market $200,000 -$60,000
Bonds $80,000 $45,000
Term deposit $45,000 $35,000

i) If Martha is an optimist which investment should she choose?
ii) If Martha is a pessimist which investment should she choose?
iii) Following the criterion of regret which investment should she choose?
iv) If Martha believes that there is a 65% chance of a good economy which investment should she choose?
v) What is the expected value of perfect information about the state of the economy?

QUESTION 2 Value of information

Show all calculations to support your answers. You may follow the methods shown in the mp4 on
Value of info for a way to answer this question if you wish.

20 marks – 4 for (a), 8 for (b), 2 for (c), 6 for (d)

A manufacturer is trying to choose between two production methods (a1 and a2) for a new product. He considers that the probability of demand for the new product being good (s1) is 0.3 and the probability that demand will be poor (s2) is 0.7.

In evaluating the two production methods the manufacturer has calculated the following table of conditional profits:

s1 s2
a1 30,000 16,000
a2 10,000 24,000

a) Which production method should be used? Show calculations.

The manufacturer asks a marketing consult for an opinion as to whether demand will be good or poor. From previous experience when the consultant has indicated that demand will be good she has been right 80% of the time, and when she has indicated that demand will be poor she has been right 65% of the time. Cost of information charged by the consultant is $3500.

b) Revise the prior probabilities in light of the consultant’s track record.
c) What is the posterior probability of good demand given that the consultant has indicated demand will be good?
d) What is the expected net gain or loss from engaging the consultant? Should the consultant be engaged? Explain the reasoning for your answer.

QUESTION 3 Simulation

This is a work integrated assessment item. The tasks are similar to what would be carried out in the workplace.

10 marks

A general practice has a nurse to attend patients with wounds and who need vaccinations.wages of the nurse is $12.50. From an analysis of one week’s operation of the nursing service the following data were derived:

Time between arrivals Number of occasions

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