Exam 3: Decision Analysis

The maximax decision criterion is used by pessimistic decision makers and maximizes the maximum outcome for every alternative.

The following payoff table provides profits based on various possible decision alternatives and various levels of demand. The probability of a low demand is 0.4,while the probability of a medium and high demand is each 0.3. (a)What decision would an optimist make? (b)What decision would a pessimist make? (c)What is the highest possible expected monetary value? (d)Calculate the expected value of perfect information for this situation.

A pessimistic decision making criterion is

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 is the EVPI?

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

To determine the effect of input changes on decision results,we should perform a sensitivity analysis.

What is the difference between the Expected Monetary Value and Expected Value with Perfect Information?

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.Using an α-value of 0.3,what is the criterion of realism value?

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.

Describe the structure of a payoff table.

It is possible for an alternative to be the best among all decision criteria.

How are decision tables organized?

Describe the utility curve of a risk avoider.

The decision maker can control states of nature.

Briefly describe decision making under uncertainty.

If one's utility curve is not a straight line (i.e. ,risk indifferent),then one's utility can,over a particular range of EMV,

In the construction of decision trees,which of the following shapes represents a state of nature node?

A market research survey is available for $5,000.Using a decision tree analysis,it is found that the expected monetary value with no survey is $49,000.If the expected value of sample information is -$4,000,what is the expected monetary value with the survey?

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 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.