Exam 3: Decision Analysis

Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of $50,000. If demand is low, he will lose $10,000. If he opens at Site 2 and demand is high he will generate a profit of $80,000, but he will lose $30,000 if demand is low. He also has decided that he will open at one of these sites. He believes that there is a 60 percent chance that demand will be high. He assigns the following utilities to the different profits: Using expected utility theory, what should Mark do?

The following is an opportunity loss table. What decision should be made based on the minimax regret criterion?

Consider the following payoff table. Based upon these probabilities, a person would select Alternative 2. Suppose there is concern about the accuracy of these probabilities. It can be stated that Alternative 2 will remain the best alternative as long as the probability of A is at least

List the six steps in decision making.

The EMV approach and Utility theory always result in the same choice of alternatives.

A second table (an opportunity loss table) must be computed when applying the maximin decision criterion.

In constructing a utility curve,

Briefly describe EVSI.

The following is a payoff table giving profits for various situations. What decision would a pessimist make?

Suppose that the payoff from an investment depends upon market conditions. A great market has payoff of $200,000, a normal market has a payoff of $100,000, and a poor market has a payoff of $20,000. What is the Laplace criterion value?

In decision theory, we call the payoffs resulting from each possible combination of alternatives and outcomes ________.

The Hurwicz criterion is also called the criterion of ________.

Utility theory provides a decision criterion that is superior to the EMV or EOL in that it may allow the decision maker to incorporate her own attitudes toward risk.

Expected monetary value (EMV) is

The several criteria (maximax, maximin, equally likely, criterion of realism, minimax regret) used for decision making under uncertainty may lead to the choice of different alternatives.

The following is an opportunity-loss table. The probabilities for the states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a person were to use the expected opportunity loss criterion, what decision would be made?

The three decision-making environments are decision making under ________.

The following is a payoff table giving profits for various situations. The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect forecast of the future were available, what is the expected value with this perfect information?

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?