Summary 539- Put yourself in the yacht dealer’s shoes. You currently are considering
other order quantities in addition to 50 and 100. Find the optimal order
quantity, that is, the exact quantity that maximizes your expected profit.
(Hint:From the two demand curves, find the expected price equation,
that is, the expected sale price for any given quantity of yachts. Given this
expected-price equation, apply the MR MC rule to maximize expected
profit.)
Discussion Question In 1997, after spending more than one-half billion
dollars in development and after extensive test marketing, Procter & Gamble
in partnership with Frito-Lay and Nabisco launched a series of snack food
products made with Olestra, a “no fat” substitute. The campaign launch
promised that consumers would enjoy the same flavor of potato chips or
crackers, but with zero fat. Although touted as a miracle product, Olestra
faced a number of uncertainties: ultimate consumer demand, willingness to
pay, and pricing; product cost, quality, and shelf life; regulatory approval;
and, most important, medical side effects (stomach cramps and the ugly
specter of diarrhea in some consumers).
Use this example and other management cases discussed most every
week in the business press to make a list of the many categories of risks faced
by managers. In particular lines of business, what categories of risks are the
most crucial for the firm’s profit? Provide examples of firm strategies to
eliminate, mitigate, or insure against these risks.Suggested References
The following texts are among the best and most complete treatments of decisions under uncertainty.
Brown, R. Rational Choice and Judgment: Decision Analysis for the Decider. Hoboken, NJ: John Wiley and
Sons, 2005.
Raiffa, H. Decision Analysis. New York: McGraw-Hill, 1997. (Paperback)
Savage, S. Decision Making with Insight. Belmont, CA: Thomson Learning, 2003.
Practical ways of using decision analysis are discussed in:
Keeney, R. L. “Making Better Decision Makers.” Decision Analysis(December 2004): 193–204.
Watkins, M. D., and M. H. Bazerman. “Predictable Surprises: The Disasters You should Have Seen
Coming.” Harvard Business Review (March 2003): 72–88.
The next two references survey the experimental evidence on decision making under uncertainty.
Camerer, C. “Individual Decision Making.” In J. H. Kagel and A. E. Roth (Eds.), The Handbook of
Experimental Economics. Princeton, NJ: Princeton University Press, 1995.
Davis, D. D., and C. A. Holt. Experimental Economics. Chapter 8. Princeton, NJ: Princeton University
Press, 1993.
The following reference is the fascinating account of the many risks and decisions involved in Ford’s redesign
of its popular Taurus model.
Walton, M. Car Wars. New York: Norton, 1999 (paperback)
The following two references offer comprehensive guides to decision-tree applications and software:
Buckshaw, D. “Decision Analysis Software Survey. OR/MS Today(October 2010): 44–53, also avail-
able online at http://www.lionhrtpub.com/orms/surveys/das/das.html.*
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