Exam 14: Decision Analysis

An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 25% and an expanding economy at 75%. What is the correct decision for this investor based on an expected monetary value criteria? Draw the decision tree for this problem.

The ____ in a decision problem represent factors that are important to the decision maker.

Exhibit 14.13 The following questions use the information below. A student wants to buy a new car. She has three cars to choose from, A, B and C. The cars differ with respect to price, performance and looks. The student has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations. -Refer to Exhibit 14.13. What formula should go in cell G15 of the Price worksheet to compute the Consistency Ratio?

Exhibit 14.8 The following questions use the information below. A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations. -Refer to Exhibit 14.8. The Consistency Ratio indicates consistency in the pairwise comparison matrix if the ratio is

Exhibit 14.6 The following questions use the information below. A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 69% chance that demand for their products will be high and a 31% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 63% chance that the customers will like the products and a 37% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is a 92% chance that demand will be high for the products. If the survey is unfavorable there is only a 30% chance that the demand will be high. The following decision tree has been built for this problem. The company has computed that the expected monetary value of the best decision without sample information is 154.35 million. The company has developed the following conditional probability table for their decision problem. -Refer to Exhibit 14.6. What is P(FH), where F = favorable response and H = high demand?

Exhibit 14.14 The following questions use the Decision Tree model and strategy table information below. -Refer to Exhibit 14.14. What formula is placed in cell B3 of the strategy table to complete the table as provided?

Exhibit 14.11 The following questions use the information below. A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 72% chance that demand for their products will be high and a 28% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 76% chance that the customers will like the products and a 24% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is an 87% chance that demand will be high for the products. If the survey is unfavorable there is only a 25% chance that the demand will be high. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\underline{\text { Demand }}$ Factory Size High Low Plant Cost ( \million ) Large 90 40 5 Small 55 20 1 The company has developed the following conditional probability table for their decision problem. -Refer to Exhibit 14.11. What formula should go in cell C13 of the probability table?

Exhibit 14.10 The following questions are based on the information below. An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 80% and an expanding economy at 20%. -Refer to Exhibit 14.10. Complete the following table to determine the expected value of perfect information for the investor.

Exhibit 14.5 The following questions are based on the information below. An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%. -Refer to Exhibit 14.5. What is the expected monetary value for the investor's problem?

Exhibit 14.12 The following questions use the information below. A decision maker is faced with two alternatives. Altermatrve 1: Recerve $4,000 wrth certannty Alternative 2: Receive $80,000 with prabability $p$ and lose $5,000 with probability (1 -p). The decision maker has determined that she is indifferent between the two alternatives when p = 0.7. -Refer to Exhibit 14.12. What is the decision maker's risk premium for this problem?

Based on the radar chart of raw scores provided below, why is this decision complex?

Although modeling provides valuable insight to decision makers, decision making remains a difficult task. Which of the following is not a primary cause for this difficulty discussed in the Decision Analysis chapter?

Exhibit 14.9 The following questions are based on the information below. An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem. -Refer to Exhibit 14.9. The original payoff data is in the worksheet called "Payoffs". What formula should go in cell B5 of this Regret Matrix to compute the regret value?

Every nonprobabilistic method has a weakness for decision making. Which of the following is incorrect regarding a method and its weakness?

What is the formula for the exponential utility function U(x)?

Exhibit 14.3 The following questions are based on the information below. An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%. -Refer to Exhibit 14.3. What formula should go in cell F5 and copied to F6:F8 of the spreadsheet if the expected regret decision rule is to be used?

Exhibit 14.3 The following questions are based on the information below. An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%. -Refer to Exhibit 14.3. What decision should be made according to the expected regret decision rule?

Decision analysis supports all but one of the following goals. Which goal is not supported?

Which of the following is a goal of decision analysis?

Exhibit 14.8 The following questions use the information below. A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations. -Refer to Exhibit 14.8. What formula should go in cell G15 of the Price worksheet to compute the Consistency Ratio?