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• DECISION THEORY

  is an analytic approach to making an economic decision by systematically defining and analyzing problem using a mathematical model. Possible alternatives possible outcomes.
• Decision making under certainty

  Knows with certainty outcome

  All info are available
• Decision making under uncertainty

  Probability of the occurence of any outcome is not available or unknown.
• Decision making under uncertainty

  1. Maximax
  2. Maximin
  3. Equally likely
  4. Criterion of realism
  5. Minimax
• MAXIMAX

  Optimistic approach

  Highest possible gain

  Maximizez the outcome
• MAXIMIN

  selects the alternative that has least lossible loss

  Pessimistic approach
• EQUALLY LIKELY

  laplace criterion

  Highest average value
• CRITERION OF REALISM

  hurwicz criterion

  Coefficient of realism
• MINIMAX

  minimum opportunity loss is selected
• Decision making under risk

  Makes use of probability has 2 methods

  EMV and EOL
• Expected monetary value approach

  Has the highest expected monetary value

  Has 2 variations

  Without perfect information

  With perfect information
• Expected opportunity loss

  Minimizes the expected opportunity loss
• DECISION TREE

  graphical approach to presenting pay off table

  Contains

  Decision points

  State of nature points

  Alternative
• Rectangle

  Decision points
• Circle

  State of nature points
• ARROW

  alternarive
• Marginal analysis

  Decision making approach that is used when there is either large or manageable numbers of alternative and state of nature in a particular problem.
• Marginal analysis

  With discrete distributions

  With normal distributions
• Network models

  An analytical approach using data nodes connected by lines using circle, edge line
• Network models

  1. Minimal spanning tree technique
  2. Maximal flow technique
  3. Shortest path technique
• Minimal spanning tree technique

  Designed to Connect all nodes or points of network at the same time minimizes total distance.

  The shortest distance that connects all the nodes in network is the optimal solution.
• Maximal flow technique

  Determines the maximum quantity or substance that can flow through a network.
• Shortest path technique

  Considers a series of route network and paths to minimize the total distance
• Program evaluation review technique

  Uses probabilistic approach

  The expected time to complete an activity and entire project are uncertain.
• Optimistic time

  Shortest length of time needed to complete an activity.
• Most likely time

  The most probable time most realistic time to finish an activity.
• Pessimistic time

  Longest time to complete an activity
• Expected time

  Solved using three estimates.
• Critical path

  Refers to longest path thru a network that is needed to complete a project.

  Any delay will delay the completion of entire project.
• Slack time

  Refers to length of time in a particular activity that can be delayed or postponed withlut delaying completion
• Critical path method

  It uses time that is certain

  Normal time

  Crash time
• Normal time

  Time needed to complete an activity
• Crash time

  Shortened time of finishing an activity because of increased resources.
• Cost volume profit analysis

  Is a quantitative approach that determines sales volume and mix products achieve the desired profitability level
• Break even analysis

  Tool that determines the point at which total cost and revenue are equal.
• Marginal analysis

  Difference of actual or targeted sale level and breakeven sales