Exam 3: Decision Analysis

Briefly describe decision tree analysis.

Suppose that the payoff from an investment depends upon market conditions.A great market has a 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?

What makes the difference between good decisions and bad decisions?

The equally likely criterion is also called the ________ criterion.

Which of the following is not one of the steps considered in the "Six Steps in Decision Making"?

When using the EOL as a decision criterion,the best decision is the alternative with the largest EOL value.

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 person selected Alternative 1,what would the expected profit be?

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?

The decision theory processes of maximizing expected monetary value (EMV)and minimizing expected opportunity loss (EOL)should lead us to choose the same alternatives.

Nick has plans to open some pizza restaurants,but he is not sure how many to open.He has prepared a payoff table to help analyze the situation. As Nick does not know how his product will be received,he assumes that all three states of nature are equally likely to occur.If he uses the equally likely criterion,what decision would he make?

In decision making under ________,there are several possible outcomes for each alternative,and the decision maker knows the probability of occurrence of each outcome.

David N.Goliath is planning to open a sporting goods store.However,the initial investment is $120,000.He currently has this money in a certificate of deposit earning 10 percent.He may leave it there if he decides not to open the store.If he opens the store and it is successful he will generate a profit of $50,000.If it is not successful,he will lose $90,000.What would the probability of a successful store have to be for David to prefer this to investing in a CD?

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 alternative that provides the greatest expected monetary value (EMV) (b)the expected value of perfect information (EVPI)

The Hurwicz criterion coefficient of realism measures the decision maker's degree of

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?

Briefly describe decision making under certainty.

The equally likely decision criterion is also called the Laplace criterion.

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 the option of not opening either.He believes that there is a 50 percent chance that demand will be high.Mark can purchase a market research study.The probability of a good demand given a favorable study is 0.8.The probability of a good demand given an unfavorable study is 0.1.There is a 60 percent chance that the study will be favorable.Should Mark use the study? Why? What is the maximum amount Mark should be willing to pay for this study? What is the maximum amount he should pay for any study?

A plant manager considers the operational cost per hour of five machine alternatives.The cost per hour is sensitive to three potential weather conditions: cold,mild,and warm.The following table represents the operations cost per hour for each alternative-state of nature combination: Assume that for a randomly selected day,there is a 30% probability of cold weather,50% probability of mild weather,and 20% probability of warm weather.What alternative is best using EMV?

Expected monetary value (EMV)is