Question 1.

Home & Beyond Inc. is a chain of domestic merchandise retail stores of furniture  and  home  goods.  As  of  2023,   Home  &   Beyond  operated approximately 500 stores across the nation. However, Home & Beyond experienced  a  negative  cash  flow  of  $200  million  last  year  and  the company is in danger of bankruptcy.

The newly appointed CEO, Rebekah, is tasked with the mission of saving the company from  potential  bankruptcy.  She  decides to  use  decision analysis to identify the most effective solutions to achieve this goal.

a) Using material from all areas studied in this module, give specific examples of what Rebekah might need to do at each stage of this analysis. (600 words maximum, 40 marks)

b) Explain in detail the advantages of the decision analysis approach. (400 words maximum, 40 marks)

c) Explain the potential problems of this approach. (400 words maximum, 30 marks)

Question 2.

The quality of the decisions made by a manager depends on both their evaluations of the probability of various events and their risk attitude. However, it is very likely that a decision maker will make mistakes when employing System  1 thinking. Referring to Prospect Theory and using diagrams where appropriate, answer the following questions:

a) Discuss what aspects of people’s risk-taking behavior are explained by the reflection effect. (300 words maximum, 30 marks)

b) Use Prospect Theory to explain why a decision maker is usually risk averse when facing a potential loss with a small probability (such as buying the insurance) but risk seeking when facing a potential gain with a small probability (such as gambling). (400 words maximum, 40 marks)

c) Develop numerical examples of decisions, such as those identified in  part  (b).  Your  examples  should  include  appropriate  value weighting functions and  probability weighting functions so  as to demonstrate how decisions such as those referred to in part (b) may or may not differ from those made using expected value. (300 words maximum, 30 marks)

Question 3.

Oriental Energy plc is a company engaged in electricity generation using wind power around the globe. The company is now trying to determine if a huge investment project is appropriate for the next 10 years. A key factor in this decision is whether a stable alternative energy technology will be available within 10 years.

Recently, scientists in the US have announced a breakthrough in nuclear fusion technology, which will eventually replace wind power. As a result, Oriental   Energy   needs   to    assess   the   probability    of   whether   a commercialised nuclear fusion technology will appear in the next 10 years.

a) Discuss whether objective or subjective probabilities could be used in helping Oriental Energy select the most appropriate strategy. (300 words maximum, 30 marks)

b) Outline the stages in a structured methodology, employing multiple probability assessors, that Oriental Energy could employ to assess the probability of the emergence of commercialised nuclear fusion technology within 10 years. (600 words maximum, 40 marks)

c) When developing  its strategy,  Oriental  Energy will  also  need to assess the probabilities of several rare events, such as structural failures in its wind turbines. Outline two approaches that can be employed  to  develop  accurate  probability  assessments  for  rare events. (400 words maximum, 30 marks)

a) Draw the decision tree which is needed to help the directors of Zastramod  decide which  research  strategy  it  should  adopt  [NO CALCULATION REQUIRED]. (20 marks)

b) Write notes on the advantages of decision trees for this type of analysis. (180 words maximum, 15 marks)

c) If Zastramod’s aim is to minimise the expected time to produce a SECV, determine under what circumstances they would decide to select strategy D. (200 words maximum, 20 marks)

d) Taking account of costs, Zastramod now decide to adopt research strategy T, and to use the Markowitz risk return model to make their decision of whether to adopt approaches L or I. Determine how risk averse Zastramod’s directors must be for them to decide to adopt strategy I. (200 words maximum, 20 marks)

e) Discuss any limitations of the analyses conducted in (a), (c) and (d) and how these limitations might be overcome. (300 words maximum, 25 marks)

Question 5.

In planning ahead for COP26, the climate change conference, a group of 20 concerned nations, known as GreenKeen, are trying to decide on which one of  two  areas  of  concern  they  should  focus  their  activities,   increasing biodiversity (B) or reducing CO2  emissions (C), in the period prior to the conference.

Their aim is to improve the quality of life for their populations over that period (measured in quality-of-life units (QoLu), which range from 0 to 10) in order to  provide  clear  evidence  to  COP26  of  the  positive  impact  of  certain measures. GreenKeen collectively decide that the impact of their focussing on B on the quality-of-life of their populations will depend upon the degree to which the rest of the world reduce their use of fossil fuels (very low, low, medium  or  large  degree  of  reduction)  and  the   impact  of  GreenKeen focussing on C on the quality-of-life of their populations will depend upon the extent to which the rest of the world increase the amount of tree planting (very low, low, medium or large amount).

GreenKeen commission experts who estimate the probability with which the rest of the world will reduce their use of fossil fuels and the resulting quality- of-life improvements which will result to GreenKeen’s  populations  in the period prior to COP26, as follows:

GreenKeen Focus on Biodiversity

GreenKeen  commission  a  different  set  of  experts  who  estimate  the probability with which the rest of the world will increase their tree planting and   the    resulting   quality-of-life    improvements   which   will    result   to GreenKeen’s populations in the period prior to COP26, as follows:

GreenKeen focus on CO2  emissions

a) Describe how GreenKeen might develop a group utility function to help them select B or C and discuss why this would be useful. (450 words maximum, 35 marks)

As a result of their deliberations, GreenKeen decide that the utility (U) function for this decision is given by:

U = (QO20(Lu))2       for 0 ≤ QoLu ≤ 2

U =   for    2 ≤ QoLu ≤ 5

U =     for     5 ≤ QoLu ≤ 7

For QoLu’s between 7M and 10M the utility function is less clearly defined, but U(8M) = 0.7, and U(10M) = 1.

b) Draw the utility curve for GreenKeen. (10 marks)

c) Determine GreenKeen’s attitude to risk for QoLus in the following categories: 0-2, 2-5, 5--7) and explain how you have made this judgement. (150 words maximum, 25 marks)

d) Determine  on  which  of  the  two  activities,  Biodiversity  or  CO2 emissions, GreenKeen should focus and outline any factors they should consider before implementing this option. (150 words maximum, 30 marks)

Question 6.

Two  companies,  Heisenberg  plc  (H)  and  Schrödinger  plc  (S),  are manufacturers of electric vehicle batteries in Kwantomstan. Since their batteries  have almost the same  performance, they are facing a price competition in Kwantomstan’s EV industry. In the middle of 2023, these two companies are trying to decide their pricing strategies for the coming year. The table below gives the estimated annual sales in million dollars for each combination of their price strategies.

S’s pricing strategy

S1                  S2                  S3

H1        (50, 50)          (0, 99)            (0, 96)

H2        (99, 0)            (49.5, 49.5)    (0, 96)

strategy

H3        (96, 0)            (96, 0)            (48, 48)

For example, if Heisenberg employs H1 and Schrödinger employs S2 then sales will be zero for H and 99 (million £ ) for S.

a) Determine the likely outcome of these price competition and explain how a more optimal outcome for both H and S might be achieved. (300 words maximum, 35 marks)

The management of Heisenberg plc (H) is also trying to renegotiate a package of pay, holiday and working hours with the workers union (U). The benefits that H will pay and the benefits that U will receive per year can be regarded as a zero-sum game and depend upon the strategies they both adopt as follows: (continued on next page)