The following payoff table shows the profit for a decision problem with two states of nature and two decision alternatives: State of Nature
Decision Alternative s1 s2
d1 10 1
d2 7 3
(a) Suppose P(s1)=0.2 and P(s2)=0.8. What is the best decision using the expected value approach? Round your answer in one decimal place.

The best decision is decision alternative
d2
, with an expected value of
3.8
.

(b) Perform sensitivity analysis on the payoffs for decision alternative d1. Assume the probabilities are as given in part (a), and find the range of payoffs under states of nature s1 and s2 that will keep the solution found in part (a) optimal. Is the solution more sensitive to the payoff under state of nature s1 or s2? Round your answer in two decimal places.

The solution is more sensitive to
s2
, as an increment of
20
for d1(s2) causes a break even between the decision alternatives, whereas it takes an increment of
50
, to provide the same effect for d1(s1).