Exam 19: Decision Analysis

A risk-taker decision maker will bail out of risky scenario only if the compensation to bail out is more than the expected monetary payoff from the risky scenario.

The expected monetary value without information is $60, and the expected monetary payoff with perfect information is $120.The expected value of perfect information is __.

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities, and (2)the advisor's track record on predicting Bull and Bear markets. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Actual Market }$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Market Condition }$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Advisor's}$$\quad$$\text {Condition}$ Investment Bull (0.8) Bear (0.2) EMV Bonds 12 -3 9 Stocks 25 -30 14 Prediction Bull Bear Bull 0.9 0.3 Bear 0.1 0.7 If the advisor predicts a Bull market the revised probability of a Bull market, P (S₁|F₁), is ________.

A CEO is looking to determine how much profit the company can make if they purchase one of their competitors.Key to the decision is how much profit each competitor is likely to make given different levels of future demand in their market.In this situation, the profits of each competitor would be considered the ____________.

Consider the following decision table with rewards in $ millions. State of Nature ( Decision Alternatives -1 2 8 -3 y 5 -0.5 0.75 1 0 0 0 x -1 -1 If you are using the maximin criterion and decide d₄, then x y is ______.

The expected monetary payoff of perfect information is the value of perfect information.

Consider the following decision table with rewards in $ millions. State of Nature ( Decision Alternatives -1 2 8 -3 x 5 -0.5 0.75 1 0 0 0 -1 -1 -1 If you are using the maximax criterion and decide d₁, then x is ______.

In a decision-making under uncertainty scenario using the strategy of minimax regret, all the entries in the opportunity loss table must be zero or positive.

Melissa Rossi, Product Manager at National Consumers, Inc.(NCI), is evaluating alternatives for introducing a new package for toothpaste.She has identified four alternative markets, and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Market Acceptance }$ Market Low (.3) Medium (.4) High (.3) Northeast Only -0.7 0 1 Southeast Only -0.2 0.2 0.8 National -1.5 -0.2 2 None (don't introduce the new package) 0 0 0 If Melissa uses the EMV criterion, the appropriate choice would be: ________.

If there is a 60% chance that the economy will grow and a 40% chance that it will not, then an investor might expect to make $75 on an investment or -$10 on that same investment, respectively for the state of the economy.In this situation, their expected return would be $49.

Melissa Rossi, Product Manager at National Consumers, Inc.(NCI), is evaluating alternatives for introducing a new package for toothpaste.She has identified four alternative markets, and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Market Acceptance }$ Market Low (.3) Medium (.4) High (.3) Northeast Only -0.7 0 1 Southeast Only -0.2 0.2 0.8 National -1.5 -0.2 2 None (don't introduce the new package) 0 0 0 The EMV of introducing the new package in the "National" market is ________.

Melissa Rossi, Product Manager at National Consumers, Inc.(NCI), is evaluating alternatives for introducing a new package for toothpaste.She has identified four alternative markets, and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Market Acceptance }$ Market Low (.3) Medium (.4) High (.3) Northeast Only -0.7 0 1 Southeast Only -0.2 0.2 0.8 National -1.5 -0.2 2 None (don't introduce the new package) 0 0 0 The expected value of perfect information is ________.

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities, and (2)the advisor's track record on predicting Bull and Bear markets. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Actual Market }$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Market Condition }$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Advisor's}$$\quad$$\text {Condition}$ Investment Bull (0.8) Bear (0.2) EMV Bonds 12 -3 9 Stocks 25 -30 14 Prediction Bull Bear Bull 0.9 0.3 Bear 0.1 0.7 If the advisor predicts a Bull market the EMV of the Stocks alternative, using revised probabilities, is closest to________.

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities, and (2)the advisor's track record on predicting Bull and Bear markets. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Actual Market }$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Market Condition }$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Advisor's}$$\quad$$\text {Condition}$ Investment Bull (0.8) Bear (0.2) EMV Bonds 12 -3 9 Stocks 25 -30 14 Prediction Bull Bear Bull 0.9 0.3 Bear 0.1 0.7 If the advisor predicts a Bear market the EMV of the Bonds alternative, using revised probabilities, is closest to ________.

Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land.If he drills a well and does not strike oil, his net loss will be $50,000, but if he drills a well and strikes oil, his net gain will be $100,000.If he does not drill, his loss is the cost of the mineral and drilling rights, which amount to $1000.For Dan's decision problem, the variable "drill the well" is one of the ___________.

Consider the following decision table with rewards in $ millions. State of Nature Decision Alternatives -1 2 8 -3 7 5 -0.5 0.75 1 0 0 0 -1 -1 -1 The opportunity loss for the combination "S₃" and "d₁" is ________.

In a decision-making scenario, if it is not known which of the states of nature will occur but the probabilities of occurrence of the states are known the scenario is called decision-making under risk.

In decision tables, what is shown along the left side of the table as the row headings?

You are evaluating investment alternatives for a ski resort.There are four alternative investments and their payoffs (in $10,000s)are shown in the following table, depending on the snow conditions for the next season. Snow Conditions Investment Good Bad 3 1 8 0 12 -4 18 -12 If you use the EMV criterion and you decide investment d₂, then the probability that the snow conditions are good is ______.

Trey Leeman, Operations Manager at National Consumers, Inc.(NCI), is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives, and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. Market Demands Alternative Low Medium High Lease New Equipment -0.5 2 4 Purchase New Equipment -3 0.5 6 Add Third Shift 0.5 0.75 1 Do Nothing 0 0 0 If Trey uses the Hurwicz criterion with alpha = 0.4, the appropriate alternative would be: _____________.