Decision Analysis Exam Prep Chapter 19

CHAPTER 19

DECISION ANALYSIS

CHAPTER LEARNING OBJECTIVES

1. Make decisions under certainty by constructing a decision table. Decision alternatives are the options open to decision makers from which they can choose. States of nature are situations or conditions arising after the decision has been made, over which the decision maker has no control. Payoff s are the gains or losses that the decision maker will reap from various decision alternatives. These three aspects (decision alternatives, states of nature, and payoff s) can be displayed in a decision table or payoff table.

Decision making under certainty is the easiest of the three types of decisions to make. In this case, the states of nature are known, and the decision maker merely selects the decision alternative that yields the highest payoff .

2. Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret. Decisions are made under uncertainty when the likelihoods of the states of nature occurring are unknown. Four approaches to making decisions under uncertainty are the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

The maximax criterion is an optimistic approach based on the notion that the best possible outcomes will occur. In this approach, the decision maker selects the maximum possible payoff under each decision alternative and then selects the maximum of these. Thus, the decision maker is selecting the maximum of the maximums. The maximin criterion is a pessimistic approach. The assumption is that the worst case will happen under each decision alternative. The decision maker selects the minimum payoff s under each decision alternative and then picks the maximum of these as the best solution. Thus, the decision maker is selecting the best of the worst cases, or the maximum of the minimums.

The Hurwicz criterion is an attempt to give the decision maker an alternative to maximax and maximin that is somewhere between an optimistic and a pessimistic approach. With this approach, decision makers select a value called alpha between 0 and 1 to represent how optimistic they are. The maximum and minimum payoff s for each decision alternative are examined. The alpha weight is applied to the maximum payoff under each decision alternative and 1 –  is applied to the minimum payoff . These two weighted values are combined for each decision alternative, and the maximum of these weighted values is selected.

Minimax regret is calculated by examining opportunity loss. An opportunity loss table is constructed by subtracting each payoff from the maximum payoff under each state of nature. This step produces a lost opportunity under each state. The maximum lost opportunity from each decision alternative is determined from the opportunity table. The minimum of these values is selected, and the corresponding decision alternative is chosen. In this way, the decision maker has reduced or minimized the regret, or lost opportunity.

3. Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility. In decision making with risk, the decision maker has some prior knowledge of the probability of each occurrence of each state of nature. With these probabilities, a weighted payoff referred to as expected monetary value (EMV) can be calculated for each decision alternative. A person who makes decisions based on these EMVs is called an EMVer. The EMV is essentially the average payoff that would occur if the decision process were to be played out over a long period of time with the probabilities holding constant.

The expected value of perfect information can be determined by comparing the EMV if the states of nature are known to the EMV with no such information. The difference in the two is the expected value of perfect information. Utility refers to a decision maker’s propensity to take risks. People who avoid risks are called risk avoiders. People who are prone to take risks are referred to as risk takers. People who use EMV generally fall between these two categories. Utility curves can be sketched to ascertain or depict a decision maker’s tendency toward risk.

4. Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information. By using Bayes’ theorem, the probabilities associated with the states of nature in decision making under risk can be revised when new information is obtained. This information can be helpful to the decision maker. However, it usually carries a cost. This cost can reduce the payoff of decision making with sample information. The EMV with sample information can be compared with the EMV without it to determine the value of sample information.

TRUE-FALSE STATEMENTS

1. In a decision analysis problem, variables (such as general macroeconomic conditions) which are not under the decision maker’s control are called prior probabilities.

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

2. In a decision analysis problem, variables (such as investing in common stocks or corporate bonds) which are under the decision maker’s control are called decision alternatives.

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

3. In a decision analysis problem, variables (such as benefits or rewards that result from investments in common stocks or corporate bonds and from a new product launch) which result from selecting a particular decision alternative are called posterior probabilities.

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

4. In a decision-making scenario, if the decision maker knows which state of nature will occur, the scenario is called decision-making under certainty.

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

5. In a decision-making scenario, if it is not known which of the states of nature will occur and further if the probabilities of occurrence of the states are also unknown, the scenario is called decision-making under double risk.

Difficulty: Easy

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

6. In a decision-making under uncertainty scenario, the decision maker chooses the decision alternative that has the minimum expected (i.e., probability-weighted) payoff among all the available alternatives.

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

7. In a decision-making under uncertainty scenario, the decision maker attempts to develop a strategy based on payoffs since virtually no information is available about which state of nature will occur.

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

8. In a decision-making under uncertainty scenario, the best decision alternative based on the strategy of minmax regret will always have zero regret.

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

9. In a decision-making under uncertainty scenario using the strategy of minmax regret, all the entries in the opportunity loss table must be zero or positive.

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

10. In a decision-making scenario, if it is not known which of the states of nature will occur but the probabilities of occurrence of the states are known. the scenario is called decision-making under risk.

Difficulty: Easy

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: Reflective Thinking

11. In a decision-making under risk scenario, the expected monetary value of a decision alternative is the arithmetic average of the payoffs to the decision alternative in each state of the nature.

Difficulty: Easy

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: Reflective Thinking

12. In a decision-making under risk scenario, the expected monetary value of a decision alternative is the weighted average (using the probability of each state of nature as the weight) of the payoffs to the decision alternative in each state of the nature.

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: Reflective Thinking

13. In decision-making under risk, the expected monetary value without information is the largest of the expected monetary values for the various decision alternatives.

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: Reflective Thinking

14. In decision-making under risk, the expected monetary payoff of perfect information is the weighted average of the best payoff for each state of nature (using the probability of the state of nature as the weight).

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: Reflective Thinking

15. The expected monetary payoff of perfect information is the value of perfect information.

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: Reflective Thinking

16. The value of perfect information is the difference between the monetary payoff with perfect information and the expected monetary payoff with no information.

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: Reflective Thinking

17. A risk-avoider decision maker will bail out of a risky scenario only if the compensation to bail out is more than the expected monetary payoff from the risky scenario.

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Application

AACSB: Analytic

18. A risk-taker decision maker will bail out of a risky scenario only if the compensation to bail out is more than the expected monetary payoff from the risky scenario.

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Application

AACSB: Analytic

19. The concept of utility can be helpful to apply decision analysis techniques to situations which do not lend themselves to expected monetary value analysis.

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: Reflective Thinking

20. The value of sample information is the ratio of the expected monetary value with information to the expected monetary value without information.

Difficulty: Medium

Learning Objective 1: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Section Reference 1: 19.4 Revising Probabilities in Light of Sample Information

Bloom’s: Knowledge

AACSB: Reflective Thinking

MULTIPLE CHOICE QUESTIONS

21. In a decision analysis problem, variables (such as investing in common stocks or corporate bonds) which are under the decision maker’s control are called ___.

a) payoffs

b) decision alternatives

c) states of nature

d) revised probabilities

e) prior probabilities

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

22. Dianna Young is evaluating a plan to expand the production facilities of International Compressors Company which manufactures natural gas compressors. Dianna feels that the price of coal is a significant factor in her decision, but she cannot control it. For her decision, the different prices of coal represent the ___.

a) payoffs

b) decision alternatives

c) states of nature

d) revised probabilities

e) prior probabilities

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Application

AACSB: Reflective Thinking

23. Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land. If he drills a well and does not strike oil his net loss will be $500,000, but if he drills a well and strikes oil his net gain will be $1,000,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $10,000. For Dan's decision problem, the variable “drill the well” is one of the ___.

a) payoffs

b) decision alternatives

c) states of nature

d) revised probabilities

e) prior probabilities

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Application

AACSB: Reflective Thinking

24. Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land. If he drills a well and does not strike oil his net loss will be $500,000, but if he drills a well and strikes oil his net gain will be $1,000,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $10,000. For Dan's decision problem, the variable “net loss of $500,000” is one of the ___.

a) payoffs

b) decision alternatives

c) states of nature

d) revised probabilities

e) prior probabilities

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Application

AACSB: Reflective Thinking

25. Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land. If he drills a well and does not strike oil his net loss will be $500,000, but if he drills a well and strikes oil his net gain will be $1,000,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $10,000. For Dan's decision problem, the variable “oil in the tract” is one of the ___.

a) payoffs

b) decision alternatives

c) states of nature

d) revised probabilities

e) prior probabilities

Difficulty: Easy

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Application

AACSB: Reflective Thinking

26. Dianna Young is evaluating a plan to expand the production facilities of International Compressors Company which manufactures natural gas compressors. Dianna feels that the price of coal is a significant factor in her decision. She can estimate how much the company would make under various prices of coal. If Dianna is making her decision under certainty, then she knows the ___________.

a) profit possible under various prices of coal

b) whether the company will expand its production facilities

c) future price of coal

d) what decisions will be made at each point

e) future state of the economy

Difficulty: Medium

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

27. Dianna Young is evaluating a plan to expand the product ion facilities of International Compressors Company which manufactures natural gas compressors. Dianna feels that the price of coal is a significant factor in her decision. Below are her estimates of payoffs from various expansion plans under different prices of coal. If Diana knows the price of coal in the future will be the same as it is today, what expansion plan should she select?

a) No expansion

b) Small expansion

c) Medium expansion

d) Cannot determine from information

e) Large expansion

Difficulty: Medium

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Analysis

AACSB: Analytic

28. Dianna Young is evaluating a plan to expand the production facilities of International Compressors Company which manufactures natural gas compressors. Dianna feels that the price of coal is a significant factor in her decision. Below are her estimates of payoffs from various expansion plans under different prices of coal. If Diana knows the price of coal in the future will be higher, what expansion plan should she select?

a) No expansion

b) Small expansion

c) Medium expansion

d) Cannot determine from information

e) Large expansion

Difficulty: Medium

Learning Objective 1: Make decisions under certainty by constructing a decision table.

Section Reference 1: 19.1 The Decision Table and Decision Making under Certainty

Bloom’s: Analysis

AACSB: Analytic

29. In decision-making under uncertainty, an optimistic approach is the ___.

a) maximin criterion

b) maximax criterion

c) Hurwicz criterion

d) minimax regret strategy

e) maximin regret strategy

Difficulty: Easy

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

30. In decision-making under uncertainty, a pessimistic approach is the ___.

a) maximin criterion

b) maximax criterion

c) Hurwicz criterion

d) minimax regret strategy

e) maximin regret strategy

Difficulty: Easy

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

31. In decision-making under uncertainty, the approach that considers only the best and the worst payoffs for each decision alternative is the ___.

a) maximin criterion

b) maximax criterion

c) Hurwicz criterion

d) minimax regret strategy

e) maximin regret strategy

Difficulty: Easy

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Knowledge

AACSB: Reflective Thinking

32. Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land. If he drills a well and does not strike oil his net loss will be $500,000, but if he drills a well and strikes oil his net gain will be $1,000,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $10,000. The probability of the state of nature “oil in the tract” is unknown. If Dan is an optimist, he would choose the ___.

a) maximin criterion

b) maximax criterion

c) Hurwicz criterion

d) minimax regret strategy

e) maximin regret strategy

Difficulty: Easy

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Application

AACSB: Reflective Thinking

33. Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land. If he drills a well and does not strike oil his net loss will be $500,000, but if he drills a well and strikes oil his net gain will be $1,000,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $10,000. The probability of the state of nature “oil in the tract” is unknown. If Dan is a pessimist, he would choose the ___.

a) maximin criterion

b) maximax criterion

c) Hurwicz criterion

d) minimax regret strategy

e) maximin regret strategy

Difficulty: Easy

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Application

AACSB: Reflective Thinking

34. Consider the following decision table with rewards in $ millions.

Using the maximax criterion, the appropriate choice would be ___.

a) d₁

b) d₂

c) d₃

d) d₄

e) d₅

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

35. Consider the following decision table with rewards in $ millions.

Using the maximin criterion, the appropriate choice would be ___.

a) d₁

b) d₂

c) d₃

d) d₄

e) d₅

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

36. Consider the following decision table with rewards in $ millions.

Using the Hurwicz criterion with alpha = 0.2, the appropriate choice would be ___.

a) d₁

b) d₂

c) d₃

d) d₄

e) d₅

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

37. Consider the following decision table with rewards in $ millions.

Using the Hurwicz criterion with alpha = 0.1, the appropriate choice would be ___.

a) d₁

b) d₂

c) d₃

d) d₄

e) d₅

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

38. Consider the following decision table with rewards in $ millions.

The opportunity loss for the combination “S₂” and “d₁” is ___.

a) 9

b) 5

c) 3

d) 0

e) –1

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

39. Consider the following decision table with rewards in $ millions.

The opportunity loss for the combination “S₃” and “d₁” is ___.

a) 9

b) 5

c) 3

d) 0

e) –1

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

40. Trey Whitmore, Operations Manager at National Consumers, Inc. (NCI), is evaluating alternatives for increasing capacity at NCI’s Fountain Hill plant. He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's) for the three possible levels of market demand:

If Trey uses the maximax criterion, the appropriate alternative would be: ___.

a) lease new equipment

b) purchase new equipment

c) add third shift

d) do nothing

e) do everything

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

41. Trey Whitmore, Operations Manager at National Consumers, Inc. (NCI), is evaluating alternatives for increasing capacity at NCI’s Fountain Hill plant. He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's) for the three possible levels of market demand:

If Trey uses the maximin criterion, the appropriate alternative would be: ___.

a) lease new equipment

b) purchase new equipment

c) add third shift

d) do nothing

e) do everything

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

42. Trey Whitmore, Operations Manager at National Consumers, Inc. (NCI), is evaluating alternatives for increasing capacity at NCI’s Fountain Hill plant. He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's) for the three possible levels of market demand:

If Trey uses the Hurwicz criterion with alpha = 0.1, the appropriate alternative would be: ___.

a) lease new equipment

b) purchase new equipment

c) add third shift

d) do nothing

e) do everything

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

43. Trey Whitmore, Operations Manager at National Consumers, Inc. (NCI), is evaluating alternatives for increasing capacity at NCI’s Fountain Hill plant. He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's) for the three possible levels of market demand:

If Trey uses the Hurwicz criterion with alpha = 0.4, the appropriate alternative would be: ___.

a) lease new equipment

b) purchase new equipment

c) add third shift

d) do nothing

e) do everything

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

44. Trey Whitmore, Operations Manager at National Consumers, Inc. (NCI), is evaluating alternatives for increasing capacity at NCI’s Fountain Hill plant. He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's) for the three possible levels of market demand:

The opportunity loss for the combination “Purchase New Equipment” and “Low” is ___.

a) 0.5

b) 1.5

c) 2.5

d) 3.0

e) 3.5

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

45. Trey Whitmore, Operations Manager at National Consumers, Inc. (NCI), is evaluating alternatives for increasing capacity at NCI’s Fountain Hill plant. He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000) for the three possible levels of market demand:

The opportunity loss for the combination “Purchase New Equipment” and “High” is ___.

a) 0.0

b) 0.5

c) 2.5

d) 3.0

e) 3.5

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

46. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000) for various market conditions:

If Ray uses the maximax criterion, the appropriate choice would be ___.

a) T-Bills

b) Stocks

c) Bonds

d) Mixture

e) none

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

47. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

If Ray uses the maximin criterion, the appropriate choice would be ___.

a) T-Bills

b) Stocks

c) Bonds

d) Mixture

e) none

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

48. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

If Ray uses the Hurwicz criterion with alpha = 0.1, the appropriate choice is ___.

a) T-Bills

b) Stocks

c) Bonds

d) Mixture

e) none

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

49. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

If Ray uses the Hurwicz criterion with alpha = 0.5, the appropriate choice is ___.

a) T-Bills

b) Stocks

c) Bonds

d) Mixture

e) none

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

50. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

If Ray uses the Hurwicz criterion with alpha = 0.9, the appropriate choice is ___.

a) T-Bills

b) Stocks

c) Bonds

d) Mixture

e) none

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

51. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

For the combination of 'T-Bills' and 'Neutral', the opportunity loss is ___.

a) 0

b) 5

c) 7

d) 8

e) –10

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

52. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

For the combination of 'Bear' and 'Mixture', the opportunity loss is ___.

a) 0

b) 5

c) 13

d) 33

e) –10

Difficulty: Medium

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

53. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

For the 'T-Bills' and 'Bonds' choices, the indifference value of Hurwicz's alpha is ___.

a) 0.8267

b) 0.7134

c) 0.6555

d) 0.3333

e) 0.5000

Difficulty: Hard

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

54. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

For the 'Stocks' and 'Bonds' choices, the indifference value of Hurwicz's alpha is ___.

a) 0.82

b) 0.71

c) 0.65

d) 0.33

e) 0.50

Difficulty: Hard

Learning Objective 1: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.

Section Reference 1: 19.2 Decision Making under Uncertainty

Bloom’s: Analysis

AACSB: Analytic

55. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new brand of toothpaste with an improved formula to promote teeth whitening. She has identified four alternative markets, and has constructed the following table which shows NCI's rewards (in $1,000,000's) for various levels of acceptance by the markets and their probabilities:

If Melissa uses the EMV criterion, the appropriate choice would be: ___.

a) Northeast only

b) Southeast only

c) National

d) None (don't introduce the new package)

Difficulty: Hard

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

56. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new brand of toothpaste with an improved formula to promote teeth whitening. She has identified four alternative markets, and has constructed the following table which shows NCI's rewards (in $1,000,000's) for various levels of acceptance by the markets and their probabilities:

The EMV of introducing the new package in the “Northeast only” market is ___.

a) $50,000

b) $70,000

c) $90,000

d) $260,000

e) $300,000

Difficulty: Hard

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

57. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new brand of toothpaste with an improved formula to promote teeth whitening. She has identified four alternative markets, and has constructed the following table which shows NCI's rewards (in $1,000,000's) for various levels of acceptance by the markets and their probabilities:

The EMV of introducing the new package in the “National” market is ___.

a) $50,000

b) $70,000

c) $90,000

d) $260,000

e) $300,000

Difficulty: Hard

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

58. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

If Ray uses the EMV criterion, the appropriate choice is ___.

a) T-Bills

b) Stocks

c) Bonds

d) Mixture

e) Bank CD’s

Difficulty: Hard

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

59. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

The EMV of investing in Stocks is ___.

a) $30,000

b) $63,000

c) $78,000

d) $81,000

e) $100,000

Difficulty: Hard

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

60. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

The EMV of investing in Bonds is ___.

a) $30,000

b) $63,000

c) $78,000

d) $81,000

e) $100,000

Difficulty: Hard

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

61. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

The EMV of investing in Mixture is ___.

a) $30,000

b) $63,000

c) $78,000

d) $81,000

e) $100,000

Difficulty: Hard

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

62. In decision-making under risk, the expected monetary value without information is ___.

a) the weighted average of the best payoff for each state of nature

b) the largest of the EMVs for the different decision alternatives

c) never smaller than the expected monetary payoff with perfect information

d) the average of the EMVs

e) half the expected monetary value with information

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Knowledge

AACSB: reflective Thinking

63. The expected monetary value without information is $2,500, and the expected monetary payoff with perfect information is $5,000. The expected value of perfect information is ___.

a) $7,500

b) $2,500

c) $1,500

d) $2,000

e) $1,250

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Application

AACSB: Analytic

64. The expected monetary value without information is $60, and the expected monetary payoff with perfect information is $120. The expected value of perfect information is __.

a) $60

b) $2

c) $180

d) $0.50

e) $120

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Application

AACSB: Analytic

65. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new brand of toothpaste with an improved formula to promote teeth whitening. She has identified four alternative markets, and has constructed the following table which shows NCI's rewards (in $1,000,000's) for various levels of acceptance by the markets and their probabilities:

The expected monetary payoff with perfect information is ___.

a) $570,000

b) $680,000

c) $760,000

d) $830,000

e) $980,000

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

66. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new brand of toothpaste with an improved formula to promote teeth whitening. She has identified four alternative markets, and has constructed the following table which shows NCI's rewards (in $1,000,000's) for various levels of acceptance by the markets and their probabilities:

The expected value of perfect information is ___.

a) $420,000

b) $570,000

c) $660,000

d) $720,000

e) $890,000

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

67. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

The expected monetary payoff with perfect information is ___.

a) $128,000

b) $137,000

c) $144,000

d) $151,000

e) $127,000

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

68. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000’s) for various market conditions:

The expected value of perfect information is ___.

a) $57,000

b) $63,000

c) $79,000

d) $82,000

e) $87,000

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Analysis

AACSB: Analytic

69. Frank Willis has the right to enter a contest where he has a 50% chance of winning $50,000 and a 50% chance of losing $0. It costs Frank nothing to enter the contest. If he is willing to give up his right to enter the contest for a sure payment of $10,000, he is ___.

a) a risk avoider

b) an optimist

c) a risk taker

d) risk neutral (an EMV'er)

e) a gambler

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Application

AACSB: Analytic

70. Frank Willis has the right to enter a contest where he has a 50% chance of winning $50,000 and a 50% chance of losing $0. It costs Frank nothing to enter the contest. If he is willing to give up his right to enter the contest for a sure payment of $25,000, he is ___.

a) a risk avoider

b) an optimist

c) a risk taker

d) risk neutral (an EMV'er)

e) a gambler

Difficulty: Medium

Learning Objective 1: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.

Section Reference 1: 19.3 Decision Making under Risk

Bloom’s: Application

AACSB: Analytic

71. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1) expected profits (in $10,000's) for various market conditions and their probabilities, and (2) the advisor's track record on predicting Bull and Bear markets:

If the advisor predicts a Bull market, the revised probability of a Bull market, P (S₁|F₁), is ___.

a) 0.877

b) 0.894

c) 0.953

d) 0.923

e) 1.000

Difficulty: Hard

Learning Objective 1: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Section Reference 1: 19.4 Revising Probabilities in Light of Sample Information

Bloom’s: Analysis

AACSB: Analytic

72. Ray Crawford is evaluating investment alternatives to invest $500,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1) expected profits (in $10,000's) for various market conditions and their probabilities, and (2) the advisor's track record on predicting Bull and Bear markets:

If the advisor predicts a Bear market the revised probability of a Bear market, P (S₂|F₂), is ___.

a) 0.524

b) 0.636

c) 0.784

d) 0.812

e) 0.000

Difficulty: Hard

Learning Objective 1: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Section Reference 1: 19.4 Revising Probabilities in Light of Sample Information

Bloom’s: Analysis

AACSB: Analytic

73. Ray Crawford is evaluating investment alternatives for the $1000,000 which he

inherited from his grandfather. His investment advisor has identified two alternatives

and constructed the following tables which show (1) expected profits (in $10,000's) for

various market conditions and their probabilities, and (2) the advisor's track record on

predicting Bull and Bear markets:

If the advisor predicts a Bull market the EMV of the Bonds alternative, using revised probabilities, is ___.

a) $85,240

b) $25,710

c) $108,450

d) $75,480

Difficulty: Hard

Learning Objective 1: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Section Reference 1: 19.4 Revising Probabilities in Light of Sample Information

Bloom’s: Analysis

AACSB: Analytic

74. Ray Crawford is evaluating investment alternatives for the $1000,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1) expected profits (in $10,000's) for various market conditions and their probabilities, and (2) the advisor's track record on predicting Bull and Bear markets:

If the advisor predicts a Bull market the EMV of the Stocks alternative, using revised probabilities, is ___.

a) $168,900

b) $207,650

c) $157,300

d) $306,000

e) $134,650

Difficulty: Hard

Learning Objective 1: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Section Reference 1: 19.4 Revising Probabilities in Light of Sample Information

Bloom’s: Analysis

AACSB: Analytic

75. Ray Crawford is evaluating investment alternatives for the $1000,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1) expected profits (in $10,000's) for various market conditions and their probabilities, and (2) the advisor's track record on predicting Bull and Bear markets:

If the advisor predicts a Bear market the EMV of the Bonds alternative, using revised probabilities, is ___.

a) $36,600

b) $24,600

c) $56,800

d) $48,200

e) $45,800

Difficulty: Hard

Learning Objective 1: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Section Reference 1: 19.4 Revising Probabilities in Light of Sample Information

Bloom’s: Analysis

AACSB: Analytic

76. Ray Crawford is evaluating investment alternatives for the $1000,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1) expected profits (in $10,000's) for various market conditions and their probabilities, and (2) the advisor's track record on predicting Bull and Bear markets:

If the advisor predicts a Bear market the EMV of the Stocks alternative, using revised probabilities, is ___.

a) $132,300

b) –$73,900

c) $127,600

d) –$99,800

e) $100,000

Difficulty: Hard

Learning Objective 1: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Section Reference 1: 19.4 Revising Probabilities in Light of Sample Information

Bloom’s: Analysis

AACSB: Analytic

77. Ray Crawford is evaluating investment alternatives for the $1000,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1) expected profits (in $10,000's) for various market conditions and their probabilities, and (2) the advisor's track record on predicting Bull and Bear markets:

The EMV of this investment opportunity with the advisor's prediction is ___.

a) $167,379

b) $174,200

c) $153,900

d) $136,700

e) $140,011

Difficulty: Hard

Learning Objective 1: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Section Reference 1: 19.4 Revising Probabilities in Light of Sample Information

Bloom’s: Analysis

AACSB: Analytic

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