Test bank ch1.s Supplement 1 Operational Decision-Making Tools Rieger 4e

Supplement 1:
Operational Decision-Making Tools: Decision Analysis

True/False

1. In a decision-making situation, the events that may occur in the future are known as
   1. payoffs.
   2. states of nature.
   3. decisions.
   4. decision tree.
2. When probabilities are assigned to states of nature the situation is referred to as
   1. decision-making under conditions of safety.
   2. decision-making under conditions of certainty.
   3. decision-making under conditions of risk.
   4. decision-making under uncertainty.
3. The outcome of a decision is referred to as
   1. a payoff.
   2. an event.
   3. a payoff table.
   4. state of nature.
4. The most widely used decision-making criterion for situations with risk is
   1. maximin.
   2. expected value.
   3. payoffs.
   4. Laplace.
5. A decision criterion in which the decision payoffs are weighted by a coefficient of optimism is known as the
   1. Hurwicz criterion.
   2. Laplace criterion.
   3. Maximax criterion.
   4. Maximin criterion.
6. The _____________ is a decision criterion in which each state of nature is weighted equally.
   1. maximin criterion
   2. minimax regret criterion
   3. LaPlace criterion
   4. Hurwicz criterion
7. A _________ decision tree is a graphical method for analyzing decision situations that require a sequence of decisions over time.
   1. maximin
   2. maximax
   3. payoff
   4. sequential
8. A decision criterion that results in the maximum of the minimum payoffs is called a
   1. maximin criterion.
   2. minimax regret criterion.
   3. maximax criterion.
   4. equal likelihood criterion.
9. Quantitative methods are tools available to operations managers to help make a decision or recommendation.
10. Quantitative methods are tools available to operations managers to help make a decision but not a recommendation.
11. ___________ is a quantitative technique supporting decision-making with uncertainty.
    1. Sequential decision tree
    2. Decision analysis
    3. Expected value of perfect information
    4. States of nature
12. A(n) _________ is a quantitative technique supporting decision-making under uncertainty.
    1. event
    2. coefficient of optimism
    3. payoff table
    4. state of nature

Multiple-Choice

1. When probabilities can be assigned to the occurrence of states of nature in the future, the situation is referred to as
2. decision-making under risk.
3. decision-making under certainty.
4. decision-making under uncertainty.
5. None of these answers is correct.

14. Which of the following techniques is the most widely used decision-making criterion under risk?

1. maximax criterion
2. minimax regret criterion
3. expected value criterion
4. Hurwicz criterion

15. The maximum value of perfect information to the decision maker is known as

1. the expected value of perfect information.
2. the expected value of imperfect information.
3. the minimum of the minimax regret.
4. None of these answers is correct.

16. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation.

The best decision for Fairco using the maximax criterion would be to

1. make the large investment.
2. make the medium investment.
3. make the small investment.
4. choose increasing demand.

Solution: Fairco assumes increasing demand. The maximax equals $1,000,000. Make the large investment.

1. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation.

The best decision for Fairco using the maximin criterion would be to

1. make the large investment.
2. make the medium investment.
3. make the small investment.
4. choose stable demand.

Solution: Fairco assumes deceasing demand. The maximin is $25,000. Make the small investment.

,

1. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation.

The best decision for Fairco using the minimax regret decision criterion would be to

1. make the large investment.
2. make the medium investment.
3. make the small investment.
4. choose decreasing demand.

Solution: The maximum regret for each decision are:

Large Investment $625,000

Medium Investment $500,000

Small Investment $750,000

Decision: Make the medium investment because $500,000 is the minimum.

1. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation.

The best decision for Fairco using the Hurwicz criterion with a coefficient of optimism equal to 0.80 would be to

1. make the large investment.
2. make the medium investment.
3. make the small investment.
4. choose stable demand.

Solution:

Large Investment $680,000

Medium Investment $360,000

Small Investment $205,000

The maximum is $680,000. Make the large investment.

1. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The following payoff table describes the decision situation.

The best decision for Fairco using the equal likelihood criterion would be to

1. make the large investment.
2. make the medium investment.
3. make the small investment.
4. choose increasing demand.

Solution:

Large Investment $266,667

Medium Investment $200,000

Small Investment $133,333

The maximum is $266,667. Choose the large investment.

1. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The business believes that the probability for increasing, stable and decreasing product demand are 0.4, 0.5, and 0.1, respectively. The following payoff table describes the decision situation.

The expected value for the large investment decision is

1. $700,000.
2. $540,000.
3. $330,000.
4. $165,000.

Solution: The expected value for Large Investment: $400,000 + $200,000 − $60,000 = $540,000

1. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The business believes that the probability for increasing, stable and decreasing product demand are 0.4, 0.5, and 0.1, respectively. The following payoff table describes the decision situation.

The expected value for the small investment decision is

1. $540,000.
2. $400,000.
3. $330,000.
4. $165,000.

The expected value for

Small Investment $100,000 + 62,500 + $2,500 = $165,000

1. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The business believes that the probability for increasing, stable and decreasing product demand are 0.4, 0.5, and 0.1, respectively. The following payoff table describes the decision situation.

The expected value for the medium investment decision is

1. $600,000.
2. $540,000.
3. $330,000.
4. $165,000.

Solution: The expected value for

Medium Investment $200,000 + $150,000 − $20,000 = $330,000

1. Fairco, a family business, is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The business believes that the probability for increasing, stable and decreasing product demand are 0.4, 0.5, and 0.1, respectively. The following payoff table describes the decision situation.

If the expected value criterion is used, then the best decision would be to

1. make the large investment.
2. make the medium investment.
3. make the small investment.
4. choose the stable demand.

Solution: The expected values are

Large Investment $540,000

Medium Investment $333,000

Small Investment $170,000

The maximum is $540,000. Make the large investment.

1. Fairco, a family business is considering making an investment in its manufacturing operation. Three decisions are under consideration: (1) a large investment; (2) a medium investment; and (3) a small investment. The business believes that there are three possible future outcomes for its product: (1) increasing demand; (2) stable demand; and (3) decreasing demand. The business believes that the probability for increasing, stable and decreasing product demand are 0.4, 0.5, and 0.1, respectively. The following payoff table describes the decision situation.

The expected value of perfect information for Fairco is

1. $602,500.
2. $540,000.
3. $62,500.
4. $25,000.

Solution: $602,500 − $540,000 = $62,500

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The following payoff table describes the company’s decision situation.

The best decision for Kallie Inc. using the maximax decision criterion is to

1. expand facilities.
2. acquire competitor.
3. subcontract production.
4. select high demand.

Solution: Kallie Inc. assumes expand facilities. The maximax is $2,000,000. Select high demand.

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The following payoff table describes the company’s decision situation.

The best decision for Kallie Inc. using the maximin decision criterion is to

1. expand facilities.
2. acquire competitor.
3. subcontract production.
4. select high demand.

Solution: Kallie Inc. assumes expand facilities. The maximin is $250,000. Select subcontract production.

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The following payoff table describes the company’s decision situation.

The best decision for Kallie Inc. using the minimax regret decision criterion is to

1. expand facilities.
2. acquire competitor.
3. subcontract production.
4. select high demand.

Solution: The minimax regret for each decision is

Expand Facilities $1,275,000

Acquire Competitor $1,250,000

Subcontract Production $1,750,000

The minimum is acquire competitor.

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The following payoff table describes the company’s decision situation.

The regret that is associated with the decision to acquire competitor when demand is low is

1. $0.
2. $525,000.
3. $1,250,000.
4. $1,275,000.

Solution: $25,000 + $500,000 = $525,000

1. Kallie Inc., a, small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The following payoff table describes the company’s decision situation.

The best decision for Kallie Inc., using the Hurwicz decision criterion with a coefficient of optimism equal to 0.3 is to

1. expand facilities.
2. acquire competitor.
3. subcontract production.
4. make no decision.

Solution: The weighted values of each decision

Expand Facilities −$275,000

Acquire Competitor −$125,000

Subcontract Production $92,500

Select the maximum: subcontract production.

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The following payoff table describes the company’s decision situation.

The value of the Hurwicz decision criterion for subcontract production when the coefficient of optimism is 0.30 is

1. $92,500.
2. $182,500.
3. $250,000.
4. $275,000.

Solution: $75,000 + $12,500 = $92,500

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand. The following payoff table describes the company’s decision situation.

The best decision for Kallie Inc. using the equal likelihood criterion is to

1. expand facilities.
2. acquire competitor.
3. subcontract production.
4. select high demand.

Solution:

Expand Facilities $375,000

Acquire Competitor $125,000

Subcontract Production $137,500

The maximum is $375,000. Select expand facilities.

1. Kallie Inc., a, small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand, with probabilities of 0.6 and 0.4, respectively. The following payoff table describes the company’s decision situation.

The expected value for the expand facilities decision is

1. $250,000.
2. $160,000.
3. $700,000.
4. $1,200,000.

Solution: $1,200,000 − $500,000 = $700,000

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand, with probabilities of 0.6 and 0.4, respectively. The following payoff table describes the company’s decision situation.

The expected value for the acquire competitor decision is

1. $250,000.
2. $160,000.
3. $700,000.
4. $1,200,000.

Solution: $450,000 − $200,000 = $250,000

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand, with probabilities of 0.6 and 0.4, respectively. The following payoff table describes the company’s decision situation.

The expected value for the subcontract production decision is

1. $250,000
2. $160,000
3. $700,000
4. $1,200,000

Solution: $150,000 + $10,000 = $160,000

1. A small parts manufacturer has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand, with probabilities of 0.6 and 0.4, respectively. The following payoff table describes the company’s decision situation.

The best decision according to the expected value criterion is

1. Acquire Competitor.
2. Expand Facilities.
3. Subcontract Production.
4. High Demand

Solution:

Expand Facilities $700,000

Acquire Facilities $250,000

Subcontract Production $160,000

Maximum = $700,000. Select expand facilities.

1. Kallie Inc., a small parts manufacturer, has just engineered a new product for the automotive industry. In order to produce the part the company can expand existing facilities, acquire a competitor, or subcontract production. The company believes the product will either experience high market demand or low market demand, with probabilities of 0.6 and 0.4, respectively. The following payoff table describes the company’s decision situation.

The expected value of perfect information for Kallie Inc.is

1. $1,210,000.
2. $700,000.
3. $510,000.
4. $312,500.

Solution: $1,210,000 − $700,000 0 =$510,000

Short Answer

38. What is decision analysis?

Difficulty: Moderate

Feedback: Decision Analysis

39. Consider the following payoff table, where the amounts are in $ millions:

If you are using Hurwicz criterion with α = 0.45 (where α is the coefficient of optimism) and decide d₃, then x is ______.

a) unfeasible; there is no value of x that would make you choose d₃

b) larger than 4

c) larger than 6.5

d) larger than 11.16

40. Consider the following payoff table with amounts in $ millions.

If you are using Hurwicz and decide d₃, then the coefficient of optimism, α, is ______.

a) undetermined; there is not enough information to find the answer

b) unfeasible; there is no value of α that would make you choose d₃

c) larger than 0.85

d) less than 0.83

41. Consider the following payoff table with amounts in $ millions.

If you are using the maximin criterion and decide d₄, then x is ______.

a) at most −1

b) less than −1

c) any value

d) cannot be determined without knowing the value of y

42. Consider the following payoff table with amounts in $ millions.

The column with investments lists mutually exclusive investment decisions. If you use the expected value criterion and you are indifferent between investments d₂ and d₃, then the probability that you assign to the state of nature S₂ is __________.

a) at least 0.45

b) at most 0.5

c) 0.5

d) at least 0.5

43. Consider the following payoff table with amounts in $ millions.

The column with investments lists mutually exclusive investment decisions. If you use the expected value criterion and you choose investment d₂, then the probability that you assign to the state of nature S₁ is __________.

a) more than 0.25 and less than 0.67

b) more than 0.33 and less than 0.67

c) more than 0.25 and less than 0.5

d) more than 0.33 and less than 0.5