1. DD Enterprise wants to build a new network of computers for its employees. The management of the company is considering three network sizes for the possible purchase: large, medium, or small.The management believes that the demand for their services will be either high level, medium level, or low level. The payoff (profit in dollars) table for the situation is given below: (a) What is the best decision using the maximax criterion? (b) What is the best decision using the maximin criterion? (c) What is the best decision using the minimax regret criterion? (d) What is the best decision using the Hurwicz’s criterion if α = 0.4? 2. Lets assume that the probability of high demand is 0.3, the probability of medium demand is 0.4, and the probability of low demand is 0.3. (a) What is your recommendation using the expected value criterion? (b) What is your recommendation using the expected opportunity loss criterion? (c) What is the value of perfect information? Interpret its’ meaning. Demand LevelHighMediumLowLarge sz$150,000$55,000$10,000Medium sz$90,000$105,000$45,000Small sz$70,000$80,000$90,000 Solution 1 a) management of company should consider large size- max(150k, 105k,90k)=150000$ b)management of company should consider small size-max(10k,45k,70k)=70000$ c)management of company should consider small size-min(150k, 105k,90k)=90000$ d)management should consider small size-maxz(66k,69k,78k)=78000$ 2 a)max(.3*150+.4*55+.3*10k, .3*90+.4*105+.3*45k,.3*70+.4*80+.3*90k) max(70k,82.5k,80k)=82500$ companyy should cosider medium size b)expected opportunity loss for large=0*.3+50k*.4+80k*.3=44k for medium=0.3*60k+0*.4+35k*.3=28.5k for small=.3*80k+25k*.4+0*.3=34k minof expected loss=28500$ so company should consider meduium size c)expected value of perfect information always equal to expected opportunity loss=28500$ if information cost more than evpi then dont buy it.

1. 1. decentralisation is not recommended in cost cutting. WHY (8marks)
Solution
What is Decentralization?
The term "decentralization" embraces a variety of concepts which must be carefully analyzed in
any particular country before determining if projects or programs should support reorganization
of financial, administrative, or service delivery systems. Decentralization -- the transfer of
authority and responsibility for public functions from the central government to intermediate and
local governments or quasi-independent government organizations and/or the private sector -- is
a complex multifaceted concept. Different types of decentralization should be distinguished
because they have different characteristics, policy implications, and conditions for success.
Types of Decentralization
Types of decentralization include political, administrative, fiscal, and market decentralization.
Drawing distinctions between these various concepts is useful for highlighting the many
dimensions to successful decentralization and the need for coordination among them.
Nevertheless, there is clearly overlap in defining any of these terms and the precise definitions
are not as important as the need for a comprehensive approach. Political, administrative, fiscal
and market decentralization can also appear in different forms and combinations across
countries, within countries and even within sectors.
Choosing the Most Appropriate Form of Decentralization
Under appropriate conditions, all of these forms of decentralization can play important roles in
broadening participation in political, economic and social activities in developing countries.
Where it works effectively, decentralization helps alleviate the bottlenecks in decision making
that are often caused by central government planning and control of important economic and
social activities. Decentralization can help cut complex bureaucratic procedures and it can
increase government officials' sensitivity to local conditions and needs. Moreover,
decentralization can help national government ministries reach larger numbers of local areas with
services; allow greater political representation for diverse political, ethnic, religious, and cultural
groups in decision-making; and relieve top managers in central ministries of "routine" tasks to
concentrate on policy. In some countries, decentralization may create a geographical focus at the
local level for coordinating national, state, provincial, district, and local programs more
effectively and can provide better opportunities for participation by local residents in decision
making. Decentralization may lead to more creative, innovative and responsive programs by
allowing local "experimentation." It can also increase political stability and national unity by

2. allowing citizens to better control public programs at the local level.
But decentralization is not a panacea, and it does have potential disadvantages. Decentralization
may not always be efficient, especially for standardized, routine, network-based services. It can
result in the loss of economies of scale and control over scarce financial resources by the central
government. Weak administrative or technical capacity at local levels may result in services
being delivered less efficiently and effectively in some areas of the country. Administrative
responsibilities may be transferred to local levels without adequate financial resources and make
equitable distribution or provision of services more difficult. Decentralization can sometimes
make coordination of national policies more complex and may allow functions to be captured by
local elites. Also, distrust between public and private sectors may undermine cooperation at the
local level.
Project and program planners must be able to assess the strengths and weaknesses of public and
private sector organizations in performing different types of functions. Before developing
elaborate plans for decentralization, they must assess the lowest organizational level of
government at which functions can be carried out efficiently and effectively and -- for functions
that do not have to be provided by government -- the most appropriate forms of privatization.
Even program planners who do not see ‘decentralization’ as their primary motive must carefully
analyze the types of decentralization already present in a country in order to tailor policy plans to
existing structures.
Centralization and decentralization are not "either-or" conditions. In most countries an
appropriate balance of centralization and decentralization is essential to the effective and
efficient functioning of government. Not all functions can or should be financed and managed in
a decentralized fashion. Even when national governments decentralize responsibilities, they often
retain important policy and supervisory roles. They must create or maintain the "enabling
conditions" that allow local units of administration or non-government organizations to take on
more responsibilities. Central ministries often have crucial roles in promoting and sustaining
decentralization by developing appropriate and effective national policies and regulations for
decentralization and strengthening local institutional capacity to assume responsibility for new
functions. The success of decentralization frequently depends heavily on training for both
national and local officials in decentralized administration. Technical assistance is often required
for local governments, private enterprises and local non-governmental groups in the planning,
financing, and management of decentralized functions.
Rationale for Decentralization
Much of the decentralization which has taken place in the past decade has been motivated by
political concerns. For example, in Latin America, decentralization has been an essential part of
the democratization process as discredited autocratic central regimes are replaced by elected

3. governments operating under new constitutions. In Africa, the spread of multi-party political
systems is creating demand for more local voice in decision making. In some countries, such as
Ethiopia, decentralization has been a response to pressures from regional or ethnic groups for
more control or participation in the political process. In the extreme, decentralization represents a
desperate attempt to keep the country together in the face of these pressures by granting more
autonomy to all localities or by forging "asymmetrical federations." A variation on this theme
has been decentralization as an outcome of long civil wars, such as in Mozambique and Uganda,
where opening political opportunities at the local levels has allowed for greater participation by
all former warring factions in the governance of the country. The transition economies of the
former socialist states have also massively decentralized as the old central apparatus crumbled.
In many countries, decentralization simply has happened in the absence of any meaningful
alternative governance structure to provide local government services. In some cases
(particularly in East Asia) decentralization appears to be motivated by the need to improve
service delivery to large populations and the recognition of the limitations of central
administration.
Although the main reason for decentralization around the world is that it is simply happening,
there are a multitude of design issues that affect the impact of different types of decentralization
on efficiency, equity and macrostability. In this regard, there is a growing body of literature
examining the economic rationale for decentralization.
The specific services to be decentralized and the type of decentralization will depend on
economies of scale affecting technical efficiency and the degree of spillover effects beyond
jurisdictional boundaries. These are issues that need to be taken into account in the design of a
decentralized system. In practice, all services do not need to be decentralized in the same way or
to the same degree. In an important economic sense, the market is the ultimate form of
decentralization in that the consumer can acquire a tailored product from a choice of suppliers.
The nature of most local public services limits this option and establishes a government role in
ensuring the provision of these services, but it does not automatically require the public sector be
responsible for the delivery of all services. Where it is possible to structure competition either in
the delivery of a service, or for the right to deliver the service, the evidence indicates that the
service will be delivered more efficiently. Although uncommon in practice, local governments
have successfully competed for the right to provide certain local services. In an array of local
public services in any particular country, a mix of solutions from deconcentration to managed
competition/privatization is likely to co-exist.
Although politics are the driving force behind decentralization in most countries, fortunately,
decentralization may be one of those instances where good politics and good economics may
serve the same end. The political objectives to increase political responsiveness and participation

4. at the local level can coincide with the economic objectives of better decisions about the use of
public resources and increased willingness to pay for local services. At least five conditions are
important for successful decentralization:
the decentralization framework must link, at the margin, local financing and fiscal authority to
the service provision responsibilities and functions of the local government - so that local
politicians can bear the costs of their decisions and deliver on their promises;
the local community must be informed about the costs of services and service delivery options
involved and the resource envelope and its sources - so that the decisions they make are
meaningful. Participatory budgeting, such as in Porto Alegre, Brazil, is one way to create this
condition.
there must be a mechanism by which the community can express its preferences in a way that is
binding on the politicians --so that there is a credible incentive for people to participate;
there must be a system of accountability that relies on public and transparent information which
enables the community to effectively monitor the performance of the local government and react
appropriately to that performance- so that politicians and local officials have an incentive to be
responsive; and,
the instruments of decentralization --the legal and institutional framework, the structure of
service delivery responsibilities and the intergovernmental fiscal system-- are designed to
support the political objectives.
Fulfilling these goals (or at least having local governments improve upon the central
government’s record) is a tall order, but achievable.
Successful decentralization is closely related to observing the design principles of: finance
following [clear assignment of] functions; informed decision making; adherence to local
priorities; and accountability. However, applying these principles in practice has not proven to be
simple. Country circumstances differ, often in subtle and complex ways, consequently the policy
and institutional instruments that establish decentralization have to be shaped to the specific
conditions of individual countries.