Sensitivity Analysis: Decision Theory
Sensitivity Analysis: Decision Theory
Sensitivity Analysis: Decision Theory
Sensitivity Analysis
SON 2 SON 1
P(1)
0 1
Step 2. Graph the line corresponding to each
alternative decision.
Alternative SON 1 SON 2 SON 2 SON 1
120
A $ 120 20
110
B 60 40
C 10 110
90 90
D 90 90
60
40
20
10
P(1)
0 1
Step 3. Identify the optimal (maximum) profit
boundaries for the range 0 ≤ P(1) ≤ 1.
Alternative SON 1 SON 2 SON 2 SON 1
120
A $ 120 20
110
B 60 40 C A
C 10 110 D
90 90
D 90 90
60
40
20
10
P(1)
0 1
Step 4. Identify the optimal profit points (OPPs).
60
40
20
10
P(1)
0 1
Step 5. Find the equation of the lines that
intersect through each OPP.
Alternative SON 1 SON 2 SON 2 SON 1
120
A $ 120 20
110
B 60 40 C A
C 10 110 D OPP 2
90 90
D 90 90 OPP 1
OPP 1 60
C: y = 110 – 100x
D: y = 90 40
OPP 2
20
A: y = 20 + 100x
10
D: y = 90
P(1)
0 1
Step 6. Find the x-coordinate of each OPP by
equating the intersecting lines and solving for x.
SON 2 SON 1
OPP 1 120
110 – 100x = 90 110
C A
– 100x = 90 – 110
D OPP 2
– 100x = – 20 90 90
OPP 1
x = 0.2
OPP 2 60
20 + 100x = 90
100x = 90 – 20 40
100x = 70
x = 0.7 20
10
P(1)
0 1
Step 7. State your decision to maximize profit.
SON 2 SON 1
A: 0.7 < P(1) ≤ 1.0 120
B: Never optimal 110
C A
C: 0 ≤ P(1) < 0.2
D OPP 2
D: 0.2 < P(1) < 0.7 90 90
OPP 1
If probability of SON 1 is 60
choose D;
if greater than 0.7, 20
choose A. 10
P(1)
0 1
Solution for part B
(payoffs as costs)
Step 1. Prepare the coordinate axes.
SON 2 SON 1
P(1)
0 1
Step 2. Graph the line corresponding to each
alternative decision.
Alternative SON 1 SON 2 SON 2 SON 1
120
A $ 120 20
110
B 60 40
C 10 110
90 90
D 90 90
60
40
20
10
P(1)
0 1
Step 3. Identify the optimal (minimum) cost
boundaries for the range 0 ≤ P(1) ≤ 1.
Alternative SON 1 SON 2 SON 2 SON 1
120
A $ 120 20
110
B 60 40
C 10 110
90 90
D 90 90
60
40 B
A
20 C
10
P(1)
0 1
Step 4. Identify the optimal cost points (OCPs).
C 10 110
90 90
D 90 90
60
OCP 1
B OCP 2
40
A
20 C
10
P(1)
0 1
Step 5. Find the equation of the lines that
intersect through each OCP.
Alternative SON 1 SON 2 SON 2 SON 1
120
A $ 120 20
110
B 60 40
C 10 110
90 90
D 90 90
OCP 1 60
A: y = 20 + 100x OCP 1
B: y = 40 + 20x B OCP 2
40
A
OCP 2 C
20
B: y = 40 + 20x
10
C: y = 110 – 100x
P(1)
0 1
Step 6. Find the x-coordinate of each OCP by
equating the intersecting lines and solving for x.
SON 2 SON 1
OCP 1 120
20 + 100x = 40 + 20x 110
100x – 20x = 40 – 20
80x = 20 90 90
x = 0.25
OCP 2 60
120x = 70 A
x = 7/12 20 C
10
P(1)
0 1
Step 7. State your decision to minimize cost.
SON 2 SON 1
A: 0 ≤ P(1) < 0.25 120
B: 0.25 < P(1) < 7/12 110
If probability of SON 1 is 60
choose B; A
if greater than 7/12, 20 C
choose C. 10
P(1)
0 1