Exam 19: Decision Theory

A decision maker has prepared the following decision tree. There are two main decision alternatives (A and B). The probabilities for the states of nature are as follows: P(H) = .3, P(M) = .5, P(L) = .2, P(S) = .25, P(P) = .75. Calculate the highest expected profit for the decision maker and determine which of the two alternatives he/she should select.

The maximax criterion is preferred by pessimistic decision makers.

A tire manufacturer needs to determine the amount of production for the coming month (high vs. low). The level of production largely depends on the level of demand. For this situation, the amount of production constitutes the ________ actions.

In a decision-making situation, the maximum amount of money that should be spent to obtain perfect information is called the ________.

Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt. The level of demand affects the success of both strategies. The states of nature (S_I) represent the levels of demand for the company products. s₁, s₂, and s₃ characterize high, medium, and low demand, respectively. The payoff values are in thousands of dollars. The management believes that weather conditions significantly affect the level of demand. 48 monthly sales reports are randomly selected. These monthly sales reports show 15 months with high demand, 28 months with medium demand, and 5 months with low demand. 12 of the 15 months with high demand had favorable weather conditions. 14 of the 28 months with medium demand had favorable weather conditions. Only 1 of the 5 months with low demand had favorable weather conditions. What is the probability that weather conditions are poor, given that the demand is high? What is the probability that weather conditions are poor, given that the demand is medium? What is the probability that weather conditions are poor, given that the demand is low?

The ________ criterion is preferred by pessimistic decision makers.

The ________ is the difference between the expected value of sampling and the cost of sampling.

When making a decision in an environment of ________, the likelihood of each state of nature can be estimated.

When the maximin criterion is used, the decision maker assumes that for any alternative action, the state of nature with the maximum payoff will take place.

When making a decision in an environment of ________, the decision maker knows which of the states of nature will actually occur.