Exam 18: Decision-Making Tools

If a decision maker is a pessimist, what decision-making criterion is appropriate? Why?

The likelihood that a decision maker will ever receive a payoff precisely equal to the EMV when making any one decision is

The expected monetary value of a decision alternative is the sum of all possible payoffs from the alternative, each weighted by the probability of that payoff occurring.

All of the following steps are taken to analyse problems with decision trees except

The expected value of perfect information is the same as the expected value with perfect information.

Dexter's Shell owns his own Waffle-Cone business and lives 50 kms from a beach resort. The sale of Waffle-Cones is highly dependent upon his location and upon the weather. At the resort, he will profit $180 per day in fair weather, $40 per day in foul weather. At home, he will profit $110 in fair weather, $70 in foul weather. Assume that on any particular day, the weather service suggests a 40% chance of fair weather. a. Construct Dexter's payoff table. b. What decision is recommended by the expected value criterion? c. What is the EVPI?

A local business owner is a bit uncertain of the demand forecast, and is timidly approaching the capacity decision for a business he is about to open. Here's how he describes the decisions that confront him over the next two years."First, I have to choose between building a large plant initially and building a small one that has room to expand. Or I could rent now, and decide whether to build next year. That one, too, could be the large version or the small. If I build small, then after one year, I can review how good business was, and decide whether to expand. If I build large, there is no further option to enlarge."Do not concern yourself with probabilities or payoff values .Simply draw the tree that illustrates the manager's decision alternatives and the chance events that go along with them. Use standard symbols for decision tree construction, and label all parts of your diagram carefully. To simplify, assume that business in the first year, and in the second, can be only "good" or "bad."

The square symbol used in drawing a decision trees represents a ________ node.

What is the EMV for Option 1 in the following decision table? States of Nature Alternatives .4 .6 Option 1 10,000 30,000 Option 2 5,000 45,000 Option 3 -4,000 60,000

A primary advantage of decision trees compared to decision tables is that decision trees

An operations manager's staff has compiled the information below for four manufacturing alternatives (A, B, C, and D) that vary by production technology and the capacity of the machinery. All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. States of Nature 1 2 3 4 Alternative A 50 55 60 65 Alternative B 30 50 80 130 Alternative C 70 80 70 65 Alternative D -100 -10 150 220 a. Assuming a maximax strategy, which alternative would be chosen? b. If maximin were used, which would be chosen? c. If the states of nature were equally likely, which alternative should be chosen?

What are decision tables?

Which technique results in an optimistic decision? Why?

The difference between the expected payoff under perfect information and the maximum expected payoff under risk is

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

If a decision maker has to make a certain decision only once, expected monetary value is a good indication of the payoff associated with the decision.

Doing nothing would yield how much profit if favorable market conditions prevail according to the following decision table Alternative Favorable market Unfavorable Market Do Nothing \ 20,000 -\ 10,000

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

A poker player is considering three different options after his opponent bet 200 before him. If the player folds, he will lose instantly. If the player calls, he figures he will win half the time. If he raises he figures that the opposing player will not re-raise him, but rather will either call or fold. He figures the opposing player will call only 1/4 of the time, folding the other 3/4 of the time. If the opposing player calls his raise, he figures he will never win. The pot size is 1,000 (including the opposing player's bet). a. Draw a decision tree for this scenario including the information provided in part b. b. Suppose that the player is thinking of raising to $400 (he will put in 200 to match the opponent's bet and another 200 as a raise, his opponent would then have to put in 200 more to call the raise). Is this the best option or should he instead call or fold? c. At what raise size is the player's EMV of a raise equivalent to simply calling?

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