Verified Test Bank Decision Analysis Chapter 19 - Business Stats Contemporary Decision 10e | Test Bank by Ken Black by Ken Black. DOCX document preview.
File: Ch19, Chapter 19: Decision Analysis
True/False
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.
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Easy
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
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.
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Easy
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
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.
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Easy
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
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.
Response: See section 19.1 The Decision Table and Decision-making under Certainty
Difficulty: Easy
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
5. In a decision-making scenario, if it is not known which state 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.
Response: See section 19.2 Decision-making under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
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.
Response: See section 19.2 Decision-making under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
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.
Response: See section 19.2 Decision-making under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
8. In a decision-making under uncertainty scenario, the best decision alternative based on the strategy of minmax regret will always have zero regret.
Response: See section 19.2 Decision-making under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
9. In a decision-making under uncertainty scenario using the strategy of minimax regret, all the entries in the opportunity loss table must be zero or positive.
Response: See section 19.2 Decision-making under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
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.
Response: See section 19.3 Decision-making under Risk
Difficulty: Easy
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
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.
Response: See section 19.3 Decision-making under Risk
Difficulty: Easy
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
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 nature.
Response: See section 19.3 Decision-making under Risk
Difficulty: Hard
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
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.
Response: See section 19.3 Decision-making under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
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).
Response: See section 19.3 Decision-making under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
15. The expected monetary payoff of perfect information is the value of perfect information.
Response: See section 19.3 Decision-making under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
16. The value of perfect information is the difference between the monetary payoff with perfect information and the expected monetary payoff with no information.
Response: See section 19.3 Decision-making under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
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.
Response: See section 19.3 Decision-making under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
18. A risk-taker decision maker will bail out of risky scenario only if the compensation to bail out is more than the expected monetary payoff from the risky scenario.
Response: See section 19.3 Decision-making under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
19. The concept of utility can be helpful to the decision analysis of situations which do not lend themselves to expected monetary value analysis.
Response: See section 19.3 Decision-making under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
20. The expected value of sample information is the ratio of the expected monetary value with information to the expected monetary value without information.
Response: See section 19.4 Revising Probabilities in light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
21. The expected value of sample information is the difference between the expected monetary value with information to the expected monetary value without information.
Response: See section 19.4 Revising Probabilities in light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information
22. When deciding whether to purchase sample information, the revised probabilities due to that information can be incorporated through the application of Bayes’ rule.
Ans: True
Response: See section 19.4 Revising Probabilities in light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information
23. If there is a 60% chance that the economy will grow and a 40% chance that it will not, then an investor might expect to make $75 on an investment or -$10 on that same investment, respectively for the state of the economy. In this situation, their expected return would be $49.
Ans: False
Response: See section 19.4 Revising Probabilities in light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information
24. If there is a 70% chance that the economy will grow and a 30% chance that it will not, then an investor might expect to make $90 on an investment or $25 on that same investment, respectively for the state of the economy. In this situation, their expected return would be $70.50.
Ans: True
Response: See section 19.4 Revising Probabilities in light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information
Multiple Choice
25. 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
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Easy
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
26. Dianna Ivy 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
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Easy
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
27. Dianna Ivy 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. She is able to estimate how much the company would make under various prices of coal. Her estimates would represent the ___________.
a) payoffs
b) decision alternatives
c) states of nature
d) revised probabilities
e) prior probabilities
Ans: a
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Easy
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
28. Dianna Ivy 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 is able to 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
Ans: c
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
29. Dianna Ivy 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?
PAYOFFS ($mil) | Lower | Same | Higher |
Large expansion | -$500 | -$100 | $1,000 |
Medium expansion | -$300 | $150 | $800 |
Small expansion | -$50 | $100 | $400 |
No expansion | $0 | $75 | $300 |
a) No expansion
b) Small expansion
c) Medium expansion
d) Cannot determine from information
e) Large expansion
Ans: c
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
30. Dianna Ivy is evaluating a plan to expand the production facilities of International Compressors Company which manufactures natural gas compressors. Dianna feels that the price of coal is a significant factor in her decision. Below are her estimates of payoffs from various expansion plans under different prices of coal. If Diana knows the price of coal in the future will be higher, what expansion plan should she select?
PAYOFFS ($mil) | Lower | Same | Higher |
Large expansion | -$500 | -$100 | $1,000 |
Medium expansion | -$300 | $150 | $800 |
Small expansion | -$50 | $100 | $400 |
No expansion | $0 | $75 | $300 |
a) No expansion
b) Small expansion
c) Medium expansion
d) Cannot determine from information
e) Large expansion
Ans: e
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
31. A CEO is looking to determine how much profit the company can make if they purchase one of their competitors. The decision of which competitor to choose is a ____________ since the CEO __________.
a) payoff; will be tracking the profit from that decision
b) certainty; has control over that decision
c) state of nature; has no control over that decision
d) decision under uncertainty; has not decided
e) decision alternative; has no control over that decision
Ans: b
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
32. A CEO is looking to determine how much profit the company can make if they purchase one of their competitors. Key to the decision is how much profit each competitor is likely to make given different levels of future demand in their market. In this situation, the levels of future demand in the market would be considered the ____________.
a) payoffs
b) decisions under certainty
c) decision alternatives
d) states of nature
e) profits
Ans: d
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
33. A CEO is looking to determine how much profit the company can make if they purchase one of their competitors. Key to the decision is how much profit each competitor is likely to make given different levels of future demand in their market. In this situation, the profits of each competitor would be considered the ____________.
a) payoffs
b) decisions under certainty
c) decision alternatives
d) states of nature
e) options
Ans: a
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
34. A CEO is looking to determine how much profit the company can make if they purchase one of their competitors. Key to the decision is how much profit each competitor is likely to make given different levels of future demand in their market. Estimates of the profits for each competitor that could be purchased are estimated in the table below based on demand. If the CEO knows that demand will significantly decrease, which competitor should the company purchase?
PAYOFFS ($mil) | Significant decrease | Small decrease | Small increase | Significant increase |
Competitor A | $50 | $100 | $270 | $1,450 |
Competitor B | $25 | $75 | $350 | $1,330 |
Competitor C | $15 | $80 | $300 | $1,700 |
Competitor D | $55 | $90 | $335 | $1,500 |
a) Competitor A
b) Competitor B
c) Cannot determine due to uncertainty
d) Competitor C
e) Competitor D
Ans: e
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
35. A CEO is looking to determine how much profit the company can make if they purchase one of their competitors. Key to the decision is how much profit each competitor is likely to make given different levels of future demand in their market. Estimates of the profits for each competitor that could be purchased are estimated in the table below based on demand. If the CEO knows that demand will experience a small increase, which competitor should the company purchase?
PAYOFFS ($mil) | Significant decrease | Small decrease | Small increase | Significant increase |
Competitor A | $50 | $100 | $270 | $1,450 |
Competitor B | $25 | $75 | $350 | $1,330 |
Competitor C | $15 | $80 | $300 | $1,700 |
Competitor D | $55 | $90 | $335 | $1,500 |
a) Competitor A
b) Competitor B
c) Cannot determine due to uncertainty
d) Competitor C
e) Competitor D
Ans: b
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
36. A CEO is looking to determine how much profit the company can make if they purchase one of their competitors. Key to the decision is how much profit each competitor is likely to make given different levels of future demand in their market. Estimates of the profits for each competitor that could be purchased are estimated in the table below based on demand. If the CEO is unsure about future demand, which competitor should the company purchase?
PAYOFFS ($mil) | Significant decrease | Small decrease | Small increase | Significant increase |
Competitor A | $50 | $100 | $270 | $1,450 |
Competitor B | $25 | $75 | $350 | $1,330 |
Competitor C | $15 | $80 | $300 | $1,700 |
Competitor D | $55 | $90 | $335 | $1,500 |
a) Competitor A
b) Competitor B
c) Cannot determine due to uncertainty
d) Competitor C
e) Competitor D
Ans: c
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
37. In decision tables, what is shown along the top of the table as the column headings?
a) states of nature
b) decisions under certainty
c) profits
d) decision alternatives
e) payoffs
Ans: a
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
38. In decision tables, what is shown along the left side of the table as the row headings?
a) states of nature
b) decisions under certainty
c) profits
d) decision alternatives
e) payoffs
Ans: d
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
39. If management is making a decision under certainty, the certainty is related to the __________ , making the final decision ____________.
a) payoff amounts; unimportant
b) states of nature; almost trivial
c) decision alternatives; depending on the state of nature
d) states of nature; important
e) payoff amounts: almost trivial
Ans: b
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Medium
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
40. 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
Response: See section 19.2 Decision -making Under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
41. 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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
42. 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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
43. Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil, his net loss will be $50,000, but if he drills a well and strikes oil, his net gain will be $100,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $1000. 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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
44. Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil, his net loss will be $50,000, but if he drills a well and strikes oil, his net gain will be $100,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $1000. For Dan's decision problem, the variable “net loss of $50,000” is one of the ___________.
a) payoffs
b) decision alternatives
c) states of nature
d) revised probabilities
e) prior probabilities
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
45. Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil his net loss will be $50,000, but if he drills a well and strikes oil his net gain will be $100,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $1000. 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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
46. Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil, his net loss will be $50,000, but if he drills a well and strikes oil, his net gain will be $100,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $1000. 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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
47. Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil his net loss will be $50,000, but if he drills a well and strikes oil his net gain will be $100,000. If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $1000. 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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Easy
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
48. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | -1 | 2 | 8 |
d2 | -3 | 7 | 5 |
d3 | -0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | -1 | -1 | -1 |
Using the maximax criterion, the appropriate choice would be __________.
a) d1
b) d2
c) d3
d) d4
e) d5
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
49. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | -1 | 2 | 8 |
d2 | -3 | 7 | 5 |
d3 | -0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | -1 | -1 | -1 |
Using the maximin criterion, the appropriate choice would be __________.
a) d1
b) d2
c) d3
d) d4
e) d5
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
50. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | -1 | 2 | 8 |
d2 | -3 | 7 | 5 |
d3 | -0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | -1 | -1 | -1 |
Using the Hurwicz criterion with alpha = 0.2, the appropriate choice would be ________.
a) d1
b) d2
c) d3
d) d4
e) d5
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
51. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | -1 | 2 | 8 |
d2 | -3 | 7 | 5 |
d3 | -0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | -1 | -1 | -1 |
Using the Hurwicz criterion with alpha = 0.1, the appropriate choice would be ________.
a) d1
b) d2
c) d3
d) d4
e) d5
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
52. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | -1 | 2 | 8 |
d2 | -3 | 7 | 5 |
d3 | -0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | -1 | -1 | -1 |
The opportunity loss for the combination “S2” and “d1” is ________.
a) 9
b) 5
c) 3
d) 0
e) -1
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
53. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | -1 | 2 | 8 |
d2 | -3 | 7 | 5 |
d3 | -0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | -1 | -1 | -1 |
The opportunity loss for the combination “S3” and “d1” is ________.
a) 9
b) 5
c) 3
d) 0
e) -1
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
54. Trey Leeman, 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.
Market Demands | |||
Alternative | Low | Medium | High |
Lease New Equipment | -0.5 | 2 | 4 |
Purchase New Equipment | -3 | 0.5 | 6 |
Add Third Shift | 0.5 | 0.75 | 1 |
Do Nothing | 0 | 0 | 0 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
55. Trey Leeman, 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.
Market Demands | |||
Alternative | Low | Medium | High |
Lease New Equipment | -0.5 | 2 | 4 |
Purchase New Equipment | -3 | 0.5 | 6 |
Add Third Shift | 0.5 | 0.75 | 1 |
Do Nothing | 0 | 0 | 0 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
56. Trey Leeman, 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.
Market Demands | |||
Alternative | Low | Medium | High |
Lease New Equipment | -0.5 | 2 | 4 |
Purchase New Equipment | -3 | 0.5 | 6 |
Add Third Shift | 0.5 | 0.75 | 1 |
Do Nothing | 0 | 0 | 0 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
57. Trey Leeman, 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.
Market Demands | |||
Alternative | Low | Medium | High |
Lease New Equipment | -0.5 | 2 | 4 |
Purchase New Equipment | -3 | 0.5 | 6 |
Add Third Shift | 0.5 | 0.75 | 1 |
Do Nothing | 0 | 0 | 0 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
58. Trey Leeman, 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.
Market Demands | |||
Alternative | Low | Medium | High |
Lease New Equipment | -0.5 | 2 | 4 |
Purchase New Equipment | -3 | 0.5 | 6 |
Add Third Shift | 0.5 | 0.75 | 1 |
Do Nothing | 0 | 0 | 0 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
59. Trey Leeman, 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.
Market Demands | |||
Alternative | Low | Medium | High |
Lease New Equipment | -0.5 | 2 | 4 |
Purchase New Equipment | -3 | 0.5 | 6 |
Add Third Shift | 0.5 | 0.75 | 1 |
Do Nothing | 0 | 0 | 0 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
60. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
If Ray uses the maximax criterion, the appropriate choice would be ________.
a) T-Bills
b) Stocks
c) Bonds
d) Mixture
e) None
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
61. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
If Ray uses the maximin criterion, the appropriate choice would be ________.
a) T-Bills
b) Stocks
c) Bonds
d) Mixture
e) None
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
62. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
63. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
64. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
65. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
For the combination of 'T-Bills' and 'Neutral', the opportunity loss is _________.
a) 0
b) 5
c) 7
d) 8
e) -10
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
66. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
For the combination of 'Bear' and 'Mixture', the opportunity loss is ______.
a) 0
b) 5
c) 13
d) 33
e) -10
Response: See section 19.2 Decision Making under Uncertainty
Difficulty: Medium
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
67. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Hard
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
68. Ray Crofford is evaluating investment alternatives to invest $100,000 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.
Market Condition | |||
Investment | Bull | Neutral | Bear |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
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
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Hard
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
69. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new package for toothpaste. 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.
Market Acceptance | |||
Market | Low (.3) | Medium (.4) | High (.3) |
Northeast Only | -0.7 | 0 | 1 |
Southeast Only | -0.2 | 0.2 | 0.8 |
National | -1.5 | -0.2 | 2 |
None (don't introduce the new package) | 0 | 0 | 0 |
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)
Response: See section 19.3 Decision-making Under Risk
Difficulty: Hard
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
70. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new package for toothpaste. 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.
Market Acceptance | |||
Market | Low (.3) | Medium (.4) | High (.3) |
Northeast Only | -0.7 | 0 | 1 |
Southeast Only | -0.2 | 0.2 | 0.8 |
National | -1.5 | -0.2 | 2 |
None (don't introduce the new package) | 0 | 0 | 0 |
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
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
71. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new package for toothpaste. 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.
Market Acceptance | |||
Market | Low (.3) | Medium (.4) | High (.3) |
Northeast Only | -0.7 | 0 | 1 |
Southeast Only | -0.2 | 0.2 | 0.8 |
National | -1.5 | -0.2 | 2 |
None (don't introduce the new package) | 0 | 0 | 0 |
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
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
72. Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's) for various market conditions and their probabilities.
Market Condition | |||
Investment | Bull (.5) | Neutral (.3) | Bear (.2) |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
If Ray uses the EMV criterion, the appropriate choice is ________.
a) T-Bills
b) Stocks
c) Bonds
d) Mixture
e) Bank CD’s
Response: See section 19.3 Decision-making Under Risk
Difficulty: Hard
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
73. Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's) for various market conditions and their probabilities.
Market Condition | |||
Investment | Bull (.5) | Neutral (.3) | Bear (.2) |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
The EMV of investing in Stocks is ________.
a) $30,000
b) $63,000
c) $78,000
d) $81,000
e) $100,000
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
74. Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's) for various market conditions and their probabilities.
Market Condition | |||
Investment | Bull (.5) | Neutral (.3) | Bear (.2) |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
The EMV of investing in Bonds is ________.
a) $30,000
b) $63,000
c) $78,000
d) $81,000
e) $100,000
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
75. Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's) for various market conditions and their probabilities.
Market Condition | |||
Investment | Bull (.5) | Neutral (.3) | Bear (.2) |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
The EMV of investing in Mixture is ________.
a) $30,000
b) $63,000
c) $78,000
d) $81,000
e) $100,000
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
76. 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
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
77. 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
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
78. 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
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
79. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new package for toothpaste. 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.
Market Acceptance | |||
Market | Low (.3) | Medium (.4) | High (.3) |
Northeast Only | -0.7 | 0 | 1 |
Southeast Only | -0.2 | 0.2 | 0.8 |
National | -1.5 | -0.2 | 2 |
None (don't introduce the new package) | 0 | 0 | 0 |
The expected monetary payoff with perfect information is ________.
a) $570,000
b) $680,000
c) $760,000
d) $830,000
e) $980,000
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
80. Melissa Rossi, Product Manager at National Consumers, Inc. (NCI), is evaluating alternatives for introducing a new package for toothpaste. 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.
Market Acceptance | |||
Market | Low (.3) | Medium (.4) | High (.3) |
Northeast Only | -0.7 | 0 | 1 |
Southeast Only | -0.2 | 0.2 | 0.8 |
National | -1.5 | -0.2 | 2 |
None (don't introduce the new package) | 0 | 0 | 0 |
The expected value of perfect information is ________.
a) $420,000
b) $570,000
c) $660,000
d) $720,000
e) $890,000
Response: See section 19.3 Decision-making Under Risk
Difficulty: Hard
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
81. Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's) for various market conditions and their probabilities.
Market Condition | |||
Investment | Bull (.5) | Neutral (.3) | Bear (.2) |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
The expected monetary payoff with perfect information is ________.
a) $128,000
b) $137,000
c) $144,000
d) $151,000
e) $127,000
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
82. Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's) for various market conditions and their probabilities.
Market Condition | |||
Investment | Bull (.5) | Neutral (.3) | Bear (.2) |
T-Bills | 3 | 3 | 3 |
Stocks | 21 | 11 | -30 |
Bonds | 15 | 4 | -3 |
Mixture | 13 | 6 | -10 |
The expected value of perfect information is ________.
a) $57,000
b) $63,000
c) $79,000
d) $82,000
e) $87,000
Response: See section 19.3 Decision-making Under Risk
Difficulty: Hard
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
83. Frank Forgione 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
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
84. Frank Forgione 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
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
85. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
The probability that the advisor predicts a Bull market and the Bull market is the actual condition p(F1ᴖS1) is ________.
a) 0.78
b) 0.9
c) 0.953
d) 0.923
e) 0.72
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
86. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
The probability that the advisor predicts a Bull market, P (F1), is ________.
a) 0.78
b) 0.894
c) 0.953
d) 0.923
e) 1.000
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
87. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
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
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Hard
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
88. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
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
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Hard
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
89. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
If the advisor predicts a Bull market the EMV of the Bonds alternative, using revised probabilities, is closest to ________.
a) $85,240
b) $25,710
c) $108,450
d) $75,480
e) $90,000
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Hard
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
90. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
If the advisor predicts a Bull market the EMV of the Stocks alternative, using revised probabilities, is closest to________.
a) $168,900
b) $207,650
c) $157,300
d) $306,000
e) $134,650
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Hard
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
91. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
If the advisor predicts a Bear market the EMV of the Bonds alternative, using revised probabilities, is closest to ________.
a) $36,600
b) $24,600
c) $56,800
d) $48,200
e) $45,800
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Hard
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
92. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
If the advisor predicts a Bear market the EMV of the Stocks alternative, using revised probabilities, is closest to ________.
a) $132,300
b) -$73,900
c) $127,600
d) -$99,800
e) $105,000
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Hard
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
93. Ray Crofford is evaluating investment alternatives for the $100,000 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.
Market Condition | Advisor's | Actual Market Condition | |||||
Investment | Bull (0.8) | Bear (0.2) | EMV | Prediction | Bull (S1) | Bear (S2) | |
Bonds | 12 | -3 | 9 | Bull (F1) | 0.9 | 0.3 | |
Stocks | 25 | -30 | 14 | Bear (F2) | 0.1 | 0.7 | |
The EMV of this investment opportunity with the advisor's prediction is closest to ________.
a) $167,379
b) $174,200
c) $153,900
d) $136,700
e) $140,011
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Hard
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
94. A particular electronic component is produced at two plants for an electronics manufacturer. Plant A produces 70% of the components used and the remainder are produced by plant B. The probability that a component is defective is 0.02 if it is produced at plant A and 0.01 if it is produced at plant B. The probability that the component is defective is ______
a) 0.3
b) 0.01
c) 0.003
d) 0.176
e) 0.017
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
95. A particular electronic component is produced at two plants for an electronics manufacturer. Plant A produces 70% of the components used and the remainder are produced by plant B. The probability that a component is defective is 0.02 if it is produced at plant A and 0.01 if it is produced at plant B. If the component is defective the revised probability it is produced at plant B, P (B|D), is closest to ________
a) 0.3
b) 0.01
c) 0.003
d) 0.176
e) 0.017
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Hard
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
96. A particular electronic component is produced at two plants for an electronics manufacturer. Plant A produces 70% of the components used and the remainder are produced by plant B. The probability that a component is defective is 0.02 if it is produced at plant A and 0.01 if it is produced at plant B. If the component is not defective the revised probability it is produced at plant A, P (A|ND), is closest to ________
a) 0.700
b) 0.824
c) 0.176
d) 0.300
e) 0.698
Ans: e
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
97. A particular electronic component is produced at two plants for an electronics manufacturer. Plant A produces 70% of the components used and the remainder are produced by plant B. The probability that a component is defective is 0.02 if it is produced at plant A and 0.01 if it is produced at plant B. If the component is defective the revised probability it is produced at plant A, P (A|D), is closest to ________
a) 0.700
b) 0.824
c) 0.176
d) 0.300
e) 0.698
Ans: b
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
98. With no additional information, an investor expects a monetary value of $2,840 through her investment choices. Additional information on the likelihood of a strong stock market would cost $800. With that additional information, the investor can expect a monetary value of $3,610. The investor ___________ purchase the additional information as after paying for the information, the expected monetary value would be ________.
a) should not; -$30
b) should; $800
c) should not; -$800
d) should; 3,610
e) should; $30
Ans: a
Response: See section 19.4 Revising Probabilities in Light of Sample Information
Difficulty: Medium
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
99. Which of the following choices is not true about decision theory?
a) Decision alternatives for one person can be states of nature for another.
b) Payoffs are always positive or zero.
c) If you play a card game at a casino, the cards you are dealt are states of nature.
d) If you decide to take a MOOC (massive open online course), how much you learn is a payoff.
e) In a two-person interaction, it is possible that the sum of the two payoffs is positive.
Response: See section 19.1 The Decision Table and Decision-making Under Certainty
Difficulty: Easy
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.1: Make decisions under certainty by constructing a decision table.
100. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | -1 | 2 | 8 |
d2 | -3 | x | 5 |
d3 | -0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | -1 | -1 | -1 |
If you are using the maximax criterion and decide d1, then x is ______.
a) at least 8
b) more than 8
c) at most 5
d) less than 8
e) at most 2
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
101. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | −1 | 2 | 8 |
d2 | −3 | y | 5 |
d3 | −0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | x | −1 | −1 |
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
e) less than −3
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
102. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | −1 | 2 | 8 |
d2 | −3 | y | 5 |
d3 | −0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | x | −1 | −1 |
If you are using the maximin criterion and decide d4, then y is ______.
a) at most −1
b) less than −1
c) any value
d) cannot be determined without knowing the value of y
e) less than −3
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Medium
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
103. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | −1 | 2 | 8 |
d2 | −3 | y | 5 |
d3 | −0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | −1 | −1 | −1 |
If you are using Hurwicz criterion with α = 0.3 and decide d2, then y is ______.
a) undetermined; there is not enough information to find the answer
b) unfeasible; there is no value of y that would make you choose d2
c) larger than 3.71
d) larger than 8
e) larger than 12.67
Response: See section 19.2 Decision Making under Uncertainty
Difficulty: Hard
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
104. Consider the following decision table with rewards in $ millions.
State of Nature | |||
Decision Alternatives | S1 | S2 | S3 |
d1 | −1 | 2 | 8 |
d2 | 0 | 6.5 | 5 |
d3 | −0.5 | 0.75 | 1 |
d4 | 0 | 0 | 0 |
d5 | −1 | −1 | −1 |
If you are using Hurwicz and decide d2, then 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 d2
c) larger than 0.4
d) less than 0.4
e) less than 0.67
Response: See section 19.2 Decision-making Under Uncertainty
Difficulty: Hard
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.2: Make decisions under uncertainty using the maximax criterion, the maximin criterion, the Hurwicz criterion, and minimax regret.
105. You are evaluating investment alternatives for a ski resort. There are four alternative investments and their payoffs (in $10,000s) are shown in the following table, depending on the snow conditions for the next season.
Snow Conditions | ||
Investment | Good | Bad |
d1 | 3 | 1 |
d2 | 8 | 0 |
d3 | 12 | −4 |
d4 | 18 | −12 |
If you use the EMV criterion and you decide investment d2, then the probability that the snow conditions are good is ______.
a) more than 0.5
b) more than 0.17
c) more than 0.25 and less than 0.67
d) less than 0.17 or more than 0.5
e) more than 0.17 and less than 0.5
Response: See section 19.3 Decision-making Under Risk
Difficulty: Hard
AACSB: Analytical
Bloom’s level: Application
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
106. You are evaluating investment alternatives for a ski resort. There are four alternative investments and their payoffs (in $10,000s) are shown in the following table, depending on the snow conditions for the next season.
Snow Conditions | ||
Investment | Good | Bad |
d1 | 3 | 1 |
d2 | 8 | 0 |
d3 | 12 | −4 |
d4 | 18 | −12 |
If you use the EMV criterion, what is the minimum probability that the conditions will be good for you to decide investment d4?
a) 0.4
b) 0.43
c) 0.5
d) 0.57
e) 0.59
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
107. You are evaluating investment alternatives for a ski resort. There are four alternative investments and their payoffs (in $10,000s) are shown in the following table, depending on the snow conditions for the next season.
Snow Conditions | ||
Investment | Good | Bad |
d1 | 3 | 1 |
d2 | 8 | 0 |
d3 | 12 | −4 |
d4 | 18 | −12 |
If you use the EMV criterion, and the probability that the snow conditions are good is p, what is the expected monetary payoff with perfect information?
a) It cannot be determined without a numeric value for the probability p.
b) 18p − 12
c) 17p − 1
d) 18p − 12
e) 17p + 1
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
108. You are evaluating investment alternatives for a ski resort. There are four alternative investments and their payoffs (in $10,000s) are shown in the following table, depending on the snow conditions for the next season.
Snow Conditions | ||
Investment | Good | Bad |
d1 | 3 | 1 |
d2 | 8 | 0 |
d3 | 12 | −4 |
d4 | 18 | −12 |
If you use the EMV criterion, the probability that the snow conditions are good is p, and you decide investment d3, what is the expected value of perfect information?
a) 12p + 3
b) 2p + 3
c) p + 5
d) p + 2
e) p + 1
Response: See section 19.3 Decision-making Under Risk
Difficulty: Medium
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.3: Make decisions under risk by constructing decision trees, calculating expected monetary value and expected value of perfect information, and analyzing utility.
109. A random person is selected from a large population in which 5% are users of a dangerous illegal drug. A drug test that correctly identifies users 99% of the times and nonusers 95% of the time is administered to this individual and gives a positive result. What is the probability that this individual is actually a user of this drug?
a) 0.99
b) 0.94
c) 0.61
d) 0.53
e) 0.51
Response: See section 19.4 Revising Probabilities in light of Sample Information
Difficulty: Hard
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
110. A random person is selected from a large population in which 5% are users of a dangerous illegal drug. A drug test that correctly identifies users 99% of the times and nonusers 95% of the time (this percentage is called “specificity” of the test) is administered to this individual and gives a positive result. What specificity would actually be required to conclude that the probability that this individual is actually a user of this drug is 0.75?
a) 0.965
b) 0.973
c) 0.978
d) 0.983
e) 0.985
Response: See section 19.4 Revising Probabilities in light of Sample Information
Difficulty: Hard
AACSB: Reflective thinking
Bloom’s level: Application
Learning Objective: 19.4: Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.
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Business Stats Contemporary Decision 10e | Test Bank by Ken Black
By Ken Black