Managerial Economics Essay

Question 1 (50%)
Part I a Draw a decision tree for Arthrodax’s decision about whether to accept the Ranger offer and how to acquire the case for the customised SoundScreamers.

b Using expected profit as the decision criterion, determine the preferred course of action for Arthrodax.
The above decision tree shows us that the preferred course of action for Arthrodax is to accept Ranger’s offer and purchase the injection moulder. This gives an expected value of $154,400.

Part II c Draw a revised decision tree for Arthrodax’s decision about whether to accept the Ranger offer and how to acquire the cases for the customised Soundscreamers.

d Using expected net profit as the decision criterion, determine the preferred course of action for Arthrodax under this new set of case facts
The above decision tree shows us that the preferred course of action for Arthrodax under this new set of case facts is to accept the order and purchase the cases. This gives an expected value of $99,900.

Part III e Draw a further revised decision tree for Arthrodax’s decision about whether to accept the Ranger offer and how to acquire the cases for customised Soundscreamers.

f Using expected net profit as the decision criterion, determine the preferred course of action for Arthrodax under this new set of case files.
The above decision tree shows us that the preferred course of action for Arthrodax under this new set of case facts is to accept the order, and if Ranger orders 100 units then purchase the moulder while if Ranger only orders 50 units then purchase the cases. This gives an expected value of $102,100.

Part IV g Using concepts of uncertainty and probability, discuss how this information affects the confidence with which you can make the recommendations above. If you were an advisor to Arthrodax, discuss how the robustness of the above recommendations could be assessed (note you do not have to do the calculations – just outline how you would undertake such an analysis).
In probability models, the decision maker is concerned with the outcome values and the amount of risk it carries. Decision-makers are often faced with a lack of information, and use probability to quantify the information gap between what they know and what should be known to provide the optimal decision. If a decision maker is aware of the states of nature, then they may be able to assign subjective probability estimates for each state. This is decision making under risk. Risk implies a degree of uncertainty. Uncertainty results from limitation of measurement. Scarce, vague and incomplete information can cause an issue with probability assessment.
Decision makers need to be aware the eliminating one risk may actually increase another risk. They need to assess the impact on the decision process in order to maintain the risk. This allows decision makers to evaluate alternate strategies prior to decision making.
The more information a decision maker has, the more efficient the decision.
Risk taking and decision making is context dependent that is context affects the form of decision analysis and the ways decisions are made.
Causality you get from a trial is called Insufficient but Non-redundant part of a condition which is itself Unnecessary but Sufficient (INUS).
For example say a housed burned down because the TV was turned on (this is a true causal statement, because if the TV hadn’t been on, then the house would not have burned down), but TVs turned on do not usually cause houses to burn down, so finding out that the TV caused the house to burn down is not very helpful for doing development policy.
Development economist Angus Deaton states that randomised control trials may identify a causal connection in a particular situation however, the cause may be specific to that trial and not on general principle.
In an example of Rube Goldberg’s flying machine, flying a kite sharpens a pencil. You could set this up as a randomised control trial however, flying a kite

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