Exam 19: Decision Analysis

Frank Forgione has the right to enter a contest where he has a 50% chance of winning $50,000 and a 50% chance of losing $0.It costs Frank nothing to enter the contest.If he is willing to give up his right to enter the contest for a sure payment of $25,000, he is ___.

The value of perfect information is the difference between the monetary payoff with perfect information and the expected monetary payoff with no information.

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$$\text { Market Condition }$ Investment Bull Neutral Bear T-Bills 3 3 3 Stocks 21 11 -30 Bonds 15 4 -3 Mixture 13 6 -10 For the combination of 'Bear' and 'Mixture', the opportunity loss 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 The probability that the advisor predicts a Bull market, P (F₁), is ________.

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.The probability of the state of nature "oil in the tract" is unknown.If Dan is an optimist, he would choose the _____________.

If management is making a decision under certainty, the certainty is related to the __________ , making the final decision ____________.

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$$\text { Market Condition }$ Investment Bull Neutral Bear T-Bills 3 3 3 Stocks 21 11 -30 Bonds 15 4 -3 Mixture 13 6 -10 If Ray uses the Hurwicz criterion with alpha = 0.5, the appropriate choice is ______.

Which of the following choices is not true about decision theory?

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 "net loss of $50,000" is one of the ___________.

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$$\text { Market Condition }$ Investment Bull (.5) Neutral (.3) Bear(.2) T-Bills 3 3 3 Stocks 21 11 -30 Bonds 15 4 -3 Mixture 13 6 -10 The EMV of investing in Stocks is ________.

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 Using the maximin criterion, the appropriate choice would be __________.

The concept of utility can be helpful to the apply decision analysis techniques to of situations which do not lend themselves to expected monetary value analysis.

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 maximin criterion, the appropriate alternative would be: _____________.

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 "oil in the tract" is one of the ___________.

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$$\text { Market Condition }$ Investment Bull(.5) Neutral(.3) Bear(.2) T-Bills 3 3 3 Stocks 21 11 -30 Bonds 15 4 -3 Mixture 13 6 -10 If Ray uses the EMV criterion, the appropriate choice is ________.

In decision tables, what is shown along the top of the table as the column headings?

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$$\text { Market Condition }$ Investment Bull(.5) Neutral(.3) Bear(.2) T-Bills 3 3 3 Stocks 21 11 -30 Bonds 15 4 -3 Mixture 13 6 -10 The expected monetary payoff with perfect information is ________.

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 -1 -1 -1 If you are using Hurwicz criterion with $\alpha$ = 0.3 and decide d₂, then y 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 Bear market the revised probability of a Bear market, P (S₂|F₂), is ________.

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 Using the maximax criterion, the appropriate choice would be __________.