Question 1

Identify and describe three methods used for decision making under conditions of uncertainty.

Accepted Answer

The three decision rules are maximax, maximin, and equally likely. Maximax is a criterion that finds an alternative that maximizes the maximum outcome. Maximin is a criterion that finds an alternative that maximizes the minimum outcome. Equally likely is a criterion that assigns equal likelihood to each state of nature.

Question 2

The campus bookstore sells highlighters that it purchases by the case. Cost per case, including shipping and handling, is $200. Revenue per case is $350. Any cases unsold will be discounted and sold at $175. The bookstore has estimated that demand will follow the pattern below
   a. Construct the bookstore's payoff table.
b. How many cases should the bookstore stock in order to maximize profit?
c. How would your answer differ if the clearance price were not $175 per case but $225 per case? (It is not necessary to re-solve the problem to answer this.)

Accepted Answer

(a) The Excel OM table is below.
(b) The highest EMV is 1705, from stocking 13 cases.
(c) If the clearance price exceeds the case cost, there will be no disincentive to stocking the maximum demand level, 14 cases.

Question 3

Steve Gentry, the operations manager of Baja Fabricators, wants to purchase a new profiling machine (it cuts compound angles on the ends of large structural pipes used in the fabrication yard). However, because the price of crude oil is depressed, the market for such equipment is down. Steve believes that the market will improve in the near future and that the company should expand its capacity. The table below displays the three equipment options he is currently considering, and the profit he expects each one to yield over a two-year period. The consensus forecast at Baja is that there is about a 30% probability that the market will pick up "soon" (within 3 to 6 months) and a 70% probability that the improvement will come "later" (in 9 to 12 months, perhaps longer).
   a. Calculate the expected monetary value of each decision alternative.
b. Which equipment option should Steve take?

Accepted Answer

(a) The expected monetary values are: "Manual machine" $111,000, "NC Machine" $154,000, and "CNC Machine" -$80,000. (b) Based upon the EMV criterion, Baja should purchase an NC machine.

Question 4

There are three equally likely states of nature (High, Medium, and Low demand). If the large factory will post profits of $50,000, $25,000, and - $10,000 under these states of nature, respectively, what is the EMV of the factory?

Accepted Answer

A)  $50,000 
B)  $25,000 
C)  $28,333.33 
D)  $21,666.67 
E)  none of the above 
A)  $50,000 
B)  $25,000 
C)  $28,333.33 
D)  $21,666.67 
E)  none of the above

Question 5

__________ is the expected payout or value of a variable that has different possible states of nature, each with an associated probability.

Accepted Answer

Expected m

Question 6

In the context of decision-making, define state of nature.

Accepted Answer

A state of nature is an occurr

Question 7

The EMV of a decision with three states of nature is $33,000. If the profit/value under the states of nature A, B, and C is $10,000, $20,000, and $50,000 and states B and C have equal probabilities, determine the likelihood of state of nature A.

Accepted Answer

10*X+20*(.5-X/2)+50*

Question 8

What is the EMV for Option 2 in the following decision table?

Accepted Answer

A)  10,000 
B)  16,000 
C)  20,000 
D)  24,000 
E)  30,000 
A)  10,000 
B)  16,000 
C)  20,000 
D)  24,000 
E)  30,000

Question 9

The EMV of a decision with three states of nature is $50. If the profit/value of A is 1/3 of B and B is 1/3 of C, determine the profit from A if B and C have an equal chance of occurring that combined is twice the chance of A occurring.

Accepted Answer

The probabilities of all three states ar

Question 10

Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort. The sale of Sno-Cones is highly dependent upon his location and upon the weather. At the resort, he will profit $110 per day in fair weather, $20 per day in foul weather. At home, he will profit $70 in fair weather, $50 in foul weather. Assume that on any particular day, the weather service suggests a 60% chance of fair weather.
a. Construct Earl's payoff table.
b. What decision is recommended by the expected value criterion?
c. What is the EVPI?

Accepted Answer

(a)The payoff table is
 @#IMG-DLM& (b) the EMV for

Question 11

The expected value with perfect information is

Accepted Answer

A)  the maximum EMV for a set of alternatives 
B)  the same as the expected value of perfect information 
C)  valuable in situations involving risk 
D)  the average return obtained when the decision maker knows which state of nature is going to occur before the decision is made 
E)  obtained using conditional probabilities 
A)  the maximum EMV for a set of alternatives 
B)  the same as the expected value of perfect information 
C)  valuable in situations involving risk 
D)  the average return obtained when the decision maker knows which state of nature is going to occur before the decision is made 
E)  obtained using conditional probabilities

Question 12

Decision trees

Accepted Answer

A)  give more accurate solutions than decision tables 
B)  give less accurate solutions than decision tables 
C)  are especially powerful when a sequence of decisions must be made 
D)  are rarely used because one needs specialized software to graph them 
E)  are too complex to be used by decision makers 
A)  give more accurate solutions than decision tables 
B)  give less accurate solutions than decision tables 
C)  are especially powerful when a sequence of decisions must be made 
D)  are rarely used because one needs specialized software to graph them 
E)  are too complex to be used by decision makers

Question 13

What limitation(s) do decision trees overcome compared to decision tables?

Accepted Answer

Decision trees work

Question 14

The expected value with perfect information

Accepted Answer

A)  equals EVPI - EMV 
B)  requires that each decision alternative have a known probability of occurrence 
C)  is an input into the calculation of the expected value of perfect information 
D)  is the average of the maximax and the maximin 
E)  none of the above 
A)  equals EVPI - EMV 
B)  requires that each decision alternative have a known probability of occurrence 
C)  is an input into the calculation of the expected value of perfect information 
D)  is the average of the maximax and the maximin 
E)  none of the above

Question 15

How is the expected value of perfect information (EVPI) found?

Accepted Answer

It is found by taking the expe

Question 16

Daily sales of bread by Salvador Monella's Baking Company follow the historical pattern shown in the table below. It costs the bakery 50 cents to produce a loaf of bread, which sells for 95 cents. Any bread unsold at the end of the day is sold to the parish jail for 25 cents per loaf. Construct the decision table of conditional payoffs. How many loaves should Sal bake each day in order to maximize contribution?

Accepted Answer

The Excel OM decision table an

Question 17

What is the expected value with perfect information of the following decision table?

Accepted Answer

A)  5,000 
B)  10,000 
C)  40,000 
D)  60,000 
E)  70,000 
A)  5,000 
B)  10,000 
C)  40,000 
D)  60,000 
E)  70,000

Question 18

A(n) __________ is a graphical means of analyzing decision alternatives and states of nature.

Accepted Answer

The answer of A(n) __________ is a graphical means of...

Question 19

If a decision maker knows for sure which state of nature will occur, he/she is making a decision under certainty.

Accepted Answer

A) True 
 B)False

Question 20

An example of a conditional value would be the payoff from selecting a particular alternative when a particular state of nature occurs.

Accepted Answer

A) True 
 B)False

Exam 18: Statistical Tools for Managers

Identify and describe three methods used for decision making under conditions of uncertainty.

There are three equally likely states of nature (High, Medium, and Low demand). If the large factory will post profits of $50,000, $25,000, and - $10,000 under these states of nature, respectively, what is the EMV of the factory?

__________ is the expected payout or value of a variable that has different possible states of nature, each with an associated probability.

In the context of decision-making, define state of nature.

The EMV of a decision with three states of nature is $33,000. If the profit/value under the states of nature A, B, and C is $10,000, $20,000, and $50,000 and states B and C have equal probabilities, determine the likelihood of state of nature A.

What is the EMV for Option 2 in the following decision table?

The EMV of a decision with three states of nature is $50. If the profit/value of A is 1/3 of B and B is 1/3 of C, determine the profit from A if B and C have an equal chance of occurring that combined is twice the chance of A occurring.

The expected value with perfect information is

Decision trees

What limitation(s) do decision trees overcome compared to decision tables?

The expected value with perfect information

How is the expected value of perfect information (EVPI) found?

What is the expected value with perfect information of the following decision table?

A(n) __________ is a graphical means of analyzing decision alternatives and states of nature.

If a decision maker knows for sure which state of nature will occur, he/she is making a decision under certainty.

An example of a conditional value would be the payoff from selecting a particular alternative when a particular state of nature occurs.

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