Term Papers on Managerial Decision Making Exam

Term Paper Title	Managerial Decision Making Exam
# of Words	3518
# of Pages (250 words per page double spaced)	14.07

Managerial Decision Making Exam

BUSINESS SCHOOL

                                                            EXAMINATION PAPER

                                                            JUNE 2000

                                                            MODEL ANSWERS

Module Code:

Module Title:    Managerial Decision Making

Date:

Time:

INSTRUCTIONS TO CANDIDATES:

Section A is compulsory. It is worth 50 marks; the share of marks for each question is shown alongside it.

Answer any TWO questions from Section B. Each question is worth 25 marks.

Time allowed:   2 hours and 15 minutes (plus 10 minutes reading time).

_____________________________________________________________________________

SECTION A

Harry Tomfilger (HT) is a supplier of fashion clothing. It faces a decision on the choice of advertising campaign for a new product that it plans to introduce through major high street retailers. The impact of any advertising campaign is believed to be closely linked to levels of consumer spending over the next year; to simplify matters, the possible alternatives have been characterised as high, medium or low expenditure. The Marketing Director has set out her assessment of the likely "pay-offs" from the three advertising campaigns in the form of the matrix given below (showing net sales revenues in Ł000s under each scenario). The company does not, initially at least, have reliable estimates of the probability of each level of consumer spending occurring.

Advertising Campaign

Consumer Spending

Low

Medium

High

Campaign A

-20

40

110

Campaign B

-30

80

  90

Campaign C

   0

40

100

Required:

(i)                                          From the company's point of view, is this as it stands a situation of risk or uncertainty? Distinguish clearly between the two, giving additional examples.

                                                                                                                                    (4 marks)

Situation of uncertainty because reliable (objective) probability measures are not available to the company ie three "states of nature" but no indication of their likelihood of occurrence. (2 marks for uncertainty + explanation + 2 marks for suitable examples).

(ii)                                        Showing your workings, what advice would you give under each of the following criteria? (these are worth 2 marks each):

(a)                Maximin

(b)               Maximax

(c)                Hurwicz Alpha (assuming a value for a of 0.8).

                                                                                                            (6 marks)

(a) Campaign C (0)    (b) Campaign A (110)            (c) Campaign A = 0.8(110) + 0.2(-20) = 84*,

Campaign B = 0.8(90) + 0.2(-30) = 66, Campaign C = 0.8 (100) + 0.2(0) = 80

(iii)                  Assume, now, that the company's Marketing Director, using the latest government predictions, decides that the probability of low consumer spending is 20% and that of high consumer spending, 35%. What is the risk neutral decision for the company?                                                                                              (5 marks)

Campaign A = 0.2(-20) + 0.45(40) + 0.35(110) = 52.5

Campaign B =            0.2(-30) + 0.45(80) + 0.35(90) = 61.5* ( maximum EV)

Campaign C = 0.2(0) + 0.45(40) + 0.35(100) = 53

(iv)                        What is the maximum that HT should be prepared to pay for information that will tell it with certainty what will happen to consumer spending next year (ie whether it will be low, medium or high)? Show clearly the method used.

                                                                                                                                    (5 m...

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