Question 1
Red Fish Blue Fish is an outdoor waterfront eatery in Victoria’s Inner Harbour that serves a variety
of daily seafood dishes. Each day, Barry Schmelly, the owner of Red Fish Blue Fish must decide how
many salmon to purchase from the local fisherman. Salmon costs him $4.45 per pound and is sold at
an average price of $16.95 per pound (across the many salmon dishes he serves each day). To
maintain his reputation for fresh seafood dishes, any leftover salmon is sold to a local cannery for
$2.50 per pound. Barry is also aware that any unmet customer demand for fresh salmon will cost
him as patrons will go to another eatery on the Harbour to eat fresh salmon and may potentially
impact future sales. He quantifies lost sales and damaged customer goodwill to be $5.00 per pound
whenever demand for salmon exceeds his supply. Historically, his daily demand for salmon is:
Daily Demand
(in pounds) 20 25 30 35 40 45 50 55 60 65 70 75
Probability 0.02 0.05 0.06 0.10 0.12 0.13 0.17 0.13 0.09 0.06 0.04 0.03
Help Barry determine how many pounds of salmon to order each day by answering the questions
below. Assuming the demand and costing information above is accurate, answer the following
questions by developing a spreadsheet model using Excel (do not use paper and pencil):
a. Construct the payoff table. You do not have to create complex formulas to do this! You
should realize that using simple calculations (+, ‐ , *, etc) will easily suffice for
creating the payoff table. Copy and paste your payoff table from Excel into your Word
document as a “picture” for proper formatting as per the guidelines on page 4.
b. What decision should be made according to the maximax decision rule?
c. What decision should be made according to the maximin decision rule?
d. What decision should be made according to the EMV decision rule?
e. What decision should be made according to the minimax regret decision rule?
f. What decision should be made according to the EOL decision rule?
g. How much should Barry be willing to pay to obtain a demand forecast that is 100% accurate?
h. Which decision rule would you recommend for Barry to use? Provide a clear explanation
why you are recommending a particular decision rule.
Question 2:
The management team of a BC Company called “Tilray Canada Inc” is considering the purchase of a
marijuana production facility that is currently up for sale in Calgary Alberta. The production of
marijuana in Canada is poised to become a multi-billion dollar business over the next several years
as the product is legalized for sale for medicinal and recreational purposes1. There is however still
uncertainty with respect to future market demand of recreatonal users that will likely result in some
“winners” and some “losers” in this growing industry. The debate over actual market demand of
recreational users is currently uncertain but the management team believes there is an 80% chance
that market demand of recreational users will be strong.
The sale of the production facility is to be determined at a sealed bid auction next week. The Analytics
Manager at Tilray estimates that if he bids $900,000, there is a 25% chance that he will obtain the
facility; if he bids $1.35 million, there is a 45% chance that he will obtain the facility; and if he bids
$1.75 million, there is an 85% chance that he will obtain the facility. If they acquire the production
facility and there is strong market demand of recreational users, they estimate a $2.2 million in profit
during the first year of operation. However, if there is weaker market demand, they expect to make
only $250,000 in profit during the first year of operation.
Please complete the following to help the management team of Tilray with their decision making
strategy:
a) Using Treeplan.xla, create a decision tree for this problem using a 1 year time boundary.
Provide a clear statement of the optimal decision strategy according to the EMV decision
criterion.
1 https://www.ibisworld.com/canada/market-research-reports/cannabis-production-industry/
https://cannabusinessplans.com/canadian-cannabis-market/
3 of 4
b) State the risk profile of the optimal decision strategy in part a).
c) Create a sensitivity table using Data Tables in Excel to show how the optimal decision may
change if the probability of the market demand of recreational users varies from 0% to 100%
in steps of 10%. Be sure to provide a statement saying what the sensitivity table means in
the context of the decision problem.
d) Develop a second sensitivity table showing how the overall optimal decision may change if
the profits associated with a strong market demand varies from $2 to $3 million dollars in
steps of $100,000. Again, state what the sensitivity table means.
Question 3
Part I:
A group of surgeons are considering opening a surgical center in downtown Vancouver, offering foot,
ankle, knee and hip surgery to the general public. The surgeons believe that their success of opening
such a facility is largely dependent on an upcoming legal decision2 (to be decided in June 2021) to
grant or not grant further public access to private health care facilities. If the BC Supreme Court
supports future public access to private health care facilities, the surgeons believe that a clinic would
have a “excellent” or “good” market opportunity. Likewise, if the court decides to restricts future
access, the surgeons believe this would create “poor market” conditions respectively. Currently, the
surgeons estimate the 3 market conditions as a function of the court’s decision is as follows:
P(“Excellent Market”) = 0.30; P(“Good Market”) = .30 and P(“Poor Market”) = 0.40. The surgeons
estimate that each patient treated will provide a unit profit margin (averaged across their various
services) of $1300 (not including the intial startup costs associated with opening the clinic) and the
number of patients treated under the 3 market conditions in their first year of operation is 800, 500
and 70 respectively. The surgeons’ initial start up costs is estimated at $350,000 for opening the
clinic. Of course, they do not need to proceed at all, in which case there is no cost.
a) Draw a decision tree by hand (using paper and pencil) and solve it using the EMV decision
criterion to help analyze their problem considering their first year of potential operation.
According to the EMV decision criterion, what the eye surgeons do? Provide a clear
statement. Take a picture of your hand‐drawn decision tree using your phone (or other
device) and incorporate it into your Word document for submission.
b) Develop a risk profile for the eye surgeons for the decision associated with opening the clinic.
Part II:
The surgeons have been approached by Legal Inc., a research firm that specializes in legal decisions
associated with healthcare policies, that offers to analyze the case and provide expertise on the likely
outcome of the market condition for the new center for a fee of $10,000. The research firm claims
their analysis is accurate “most of the time” and provides you with the following information of its
past performance of outcomes associated with similar legal decisions and their research findings:
Actual Market Outcomes
Excellent
Market
Good
Market
Poor
Market
Research Predicted Postive Markets 0.913 0.39 0.15
Research Predicted Negative Markets 0.09 0.61 0.85
a) Develop a second decision tree for the eye surgeons to reflect the option of hiring the research
firm. Draw this decision tree by hand and evaluate it using the EMV decision criterion. Use the
same cash flows provided in Part I. Hand in your hand drawn solution with a concluding
statement with respect to the surgeons’ optimal decisions.
b) Use Treeplan to replicate your hand-drawn decision tree in Part II a). Copy and paste your
decision tree into your Word document as a picture per the guidelines on page 5.
c) State the Risk Profile associated with the optimal decision strategy (alternative) under the
context of the EMV decision criterion for Part II.
Sample Solution
