Exam 3: Decision Analysis

Another name for a decision table is a

The difference in decision making under uncertainty and decision making under certainty is that under uncertainty, we think we know the probabilities of the states of nature, while under certainty we know exactly the probabilities of the states of nature.

Which of the following is true about the expected value of perfect information?

The following is a payoff table giving profits for various situations. What is the expected value of perfect information?

Barbour Electric is considering the introduction of a new product.This product can be produced in one of several ways: (a)using the present assembly line at a cost of $25 per unit, (b)using the current assembly line after it has been overhauled (at a cost of $10,000)with a cost of $22 per unit; and (c)on an entirely new assembly line (costing $30,000)designed especially for the new product with a per unit cost of $20.Barbour is worried, however, about the impact of competition.If no competition occurs, they expect to sell 15,000 units the first year.With competition, the number of units sold is expected to drop to 9,000.At the moment, their best estimate is that there is a 40% chance of competition.They have decided to make their decision based on the first year sales. (a)Develop the decision table (EMV). (b)Develop a decision table (EOL). (c)What should they do?

Any problem that can be presented in a decision table can also be graphically portrayed in a decision tree.

Briefly describe EVSI.

It is sometimes said that, "Those who gamble the most are the ones who can least afford to lose." These people gamble because

A utility curve that shows utility increasing at an increasing rate as the monetary value increases represents the utility curve of a risk seeker.

A company is considering producing a new children's bar soap.A market research firm has told the company that if they perform a survey, a positive survey of a favorable market occurs 65 percent of the time.That is, P(positive survey | favorable market)= 0.65.Similarly, 40 percent of the time the survey falsely predicts a favorable market; thus, P(positive survey | unfavorable market)= 0.40.These statistics indicate the accuracy of the survey.Prior to contacting the market research firm, the company's best estimate of a favorable market was 50 percent.So, P(favorable market)= 0.50 and P(unfavorable market)= 0.50.Using Bayes' theorem, determine the probability of a favorable market given a favorable survey.

List the six steps in decision making.

The Hurwicz criterion is also called the criterion of

A concessionaire for the local ballpark has developed a table of conditional values for the various alternatives (stocking decision)and states of nature (size of crowd). If the probabilities associated with the states of nature are 0.30 for a large crowd, 0.50 for an average crowd, and 0.20 for a small crowd, determine: (a)the opportunity loss table. (b)minimum expected opportunity loss (EOL).

The expected value of sample information (EVSI)can be used to

The maximum value in a regret table constructed from a decision table populated with cost data corresponds to the optimal alternative.

Which is the more crucial mistake in the decision-making process - estimating the payoffs poorly or omitting an important alternative?

The following is a payoff table giving costs for various situations. What decision would an optimist make?

Utility theory may help the decision maker include the impact of qualitative factors that are difficult to include in the EMV model.

Describe the utility curve of a risk avoider.

You are considering adding a new food product to your store for resale.You are certain that, in a month, minimum demand for the product will be 6 units, while maximum demand will be 8 units.(Unfortunately, the new product has a one-month shelf life and is considered to be waste at the end of the month.)You will pay $60/unit for this new product while you plan to sell the product at a $40/unit profit.The estimated demand for this new product in any given month is 6 units(p = 0.1), 7 units(p = 0.4), and 8 units(p = 0.5).Using EMV analysis, how many units of the new product should be purchased for resale?