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in supply if there are problems in the delivery system. States of Nature ? Uncertainty in the decision problem ? There is uncertainty as to which decision to take because there is uncertainty over future sale. ? To help simplify the situation, the pany is planning for one three possible sales levels in the future: ? Low ? Medium ? High Under control vs. out off control ? What is under control and what is outside of control ? The pany is faced with a range of alternative decisions over which it has control (. it can choose among them) ? And it also faces an uncertain future in terms of sales. This future position is generally referred to as the possible states of nature: future sale levels, are outside the direct control of the pany but they do include all the possibilities and only one of them can actually occur. Decision Tree I HP Low M BD BA Medium High Low Medium High Low Medium High Decision tree I ?The decision tree starts from the lefthand side and gradually moves across to the right. ?A box is used to indicate that at this point we must take a decision (the box is technically known as a decision node) ?The three alternatives branch out from this node: ?to manufacture (M) ?to buy domestically (BD) ?to buy abroad (BA) ?Each of these branches leads to a oute node (indicated by a circle), which presents the possible states of nature: ?Low (L) ?Medium (M) ?High (H) Information ? Information for Decision making: ? In order to make decision we clearly need additional information to help us assess the alternatives. ? The key pieces of information would relate to ? the financial consequences of each bination of decision (called payoff) ? state of nature (call probability) Decision tree with payoff HP Low M BD BA Medium High Low Medium High Low Medium High Decision tree with payoff (value in $000s) 15 10 55 10 30 25 5 20 40 ?With the payoff information, which of the three alternative decisions would you remend? ?The answer has to be: it depends. ?How reliable you think the information is? ?How risky the various options are? ?How critical the decision is to the pany’ s future? ?The key factor wi