Use graphical sensitivity analysis to determine the range of demand probabilities for which each of the decision alternatives has the largest expected value.
I have two possible decisions, each with a favorable and unfavorable outcome. How do I do this?
What is the expected value of each outcome, that is the point of the assignment.
EV=Pr(favorable)*valuefavorable-Pr(unfavor)*velueunfavorable
To perform graphical sensitivity analysis in this case, follow these steps:
1. Identify the decision alternatives: In your case, you have two possible decisions.
2. Determine the possible demand probabilities: Assign a range of probabilities for each decision alternative. For example, you can use values from 0% to 100% in increments of 10%. This will help you visualize the sensitivity of expected values to changes in demand probabilities.
3. Calculate the expected value for each decision alternative: For each combination of demand probabilities and decision alternatives, calculate the expected value by multiplying each outcome by its corresponding probability and summing the results.
4. Create a graph: Use a graphing tool to plot the expected value on the y-axis and the demand probabilities on the x-axis. Create a line graph with two lines, one for each decision alternative. The x-axis will represent the range of demand probabilities, and the y-axis will represent the expected value.
5. Analyze the graph: Observe the two lines on the graph. The decision alternative with the highest expected value at each point on the x-axis represents the best choice for that range of demand probabilities.
By visually comparing the lines on the graph, you can determine the range of demand probabilities for which each decision alternative has the largest expected value.