Exam 17: Decision-Making Tools

The campus bookstore sells stadium blankets embroidered with the university crest. The blankets must be purchased in bundles of one dozen each. Each blanket in the bundle costs $65, and will sell for $90. Blankets unsold by homecoming will be clearance priced at $20. The bookstore estimates that demand patterns will follow the table below. (a) Build the decision table. (b) What is the maximum expected monetary value? (c) How many bundles should be purchased?

A(n) ________ is a tabular means of analyzing decision alternatives and states of nature.

A local business owner is a bit uncertain of the demand forecast, and he 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 expected value with perfect information assumes that all states of nature are equally likely.

The following decision tree has how many state-of-nature nodes?

A branch of a decision tree that is less favorable than other available options may be ________.

In a decision tree, the expected monetary values are computed by working from left to right.

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

When solving decision trees, what phrase represents the act of dropping an alternative from consideration because it is less favorable than another available option?

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

What decision criterion would be used by a pessimistic decision maker solving a problem under conditions of uncertainty?

What are decision tables?

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

What is the expected value with perfect information of the following decision table?

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

If a decision maker can assign probabilities of occurrences to the states of nature, then the decision-making environment is Decision Making under Uncertainty.

Describe the meaning of EVPI.

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

A(n) ________ is a graphical means of analyzing decision alternatives and states of nature.

The expected value of perfect information (EVPI) is the: