Exam 12: Decision Analysis

The Golden Jill Mining Company is interested in procuring 10,000 acres of coal mines in Powder River Basin. The mining company is considering two payment-plan options to buy the mines: I. 100% Payment II. Installment-Payment The payoff received will be based on the quality of coal obtained from the mines which has been categorized as High, Normal, and Poor Quality as well as the payment plan. The profit payoff in million dollars resulting from the various combinations of options and quality are provided below: a. Suppose that management believes that the probability of obtaining High Quality coal is 0.55, probability of Normal Quality Coal is 0.35, and probability of Poor Quality Coal is 0.1. Use the expected value approach to determine an optimal decision. b. Suppose that management believes that the probability of High Quality coal is 0.25, probability of Normal Quality Coal is 0.4, and probability of Poor Quality Coal is 0.35. What is the optimal decision using the expected value approach?

An uncertain future event affecting the consequence associated with a decision is known as a _____.

Three decision makers have assessed payoffs for the following decision problem (payoff in dollars): The indifference probabilities are as follows: a. Plot the utility function for money for each decision maker. b. Classify each decision maker as a risk avoider, a risk taker, or risk neutral. c. For the payoff of 40, what is the premium that the risk avoider will pay to avoid risk? What is the premium that the risk taker will pay to have the opportunity of the high payoff?

_____ refer to the probabilities of the states of nature after revising the prior probabilities based on sample information.

Consider an advertising company which has to decide on investing with the current team that has a 50 percent chance of earning a net profit of $35,000 and a 50 percent chance of losing $17,500 invested. a. Write the equation for the exponential function that approximates the advertising company's utility function. b. Plot the exponential utility function for this advertising company for x values between -30,000 and 45,000. Is the management for the advertising company risk seeking, risk neutral, or risk averse? c. Suppose the management would like to invest more on marketing and actually be willing to make an investment that has a 50 percent chance of earning $50,000 and a 50 percent chance of losing $25,000. Plot the exponential function that approximates this utility function and compare it to the utility function from part b. Is the management becoming more risk seeking or more risk averse?

Exponential utility functions indicate that the decision maker is _____.

A special case of sample information where the information tells the decision maker exactly which state of nature is going to occur is known as_____ information.

A(n) _____ refers to the result obtained when a decision alternative is chosen and a chance event occurs.

The study of how changes in the probability assessments for the states of nature or changes in the payoffs affect the recommended decision alternative is known as _____.

Meega airlines decided to offer direct service from Akron to Clearwater beach, Florida. Management must decide between full-price service using a company's new fleet of jet aircraft and a discount-service using smaller capacity commuter planes. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service on Clearwater beach: high, moderate, and low. The following table shows the estimated quarterly profits (in thousands of dollars): a. If the demand probabilities are 0.3, 0.5, and 0.2, what is the best decision using the expected value approach? b. Construct a risk profile for the optimal decision in part a. What is the probability of the profit exceeding $700,000?

Emil Hansen is interested in leasing a sports-utility vehicle and has contacted three automobile dealers for pricing information. Each dealer offered Emil a 24-month lease with no down payment due at the time of signing. Each lease includes a monthly cost, mileage allowances, and the cost for additional miles and the details are given in the below table. Emil decided to choose the lease option that will minimize his total 24-month cost. Emil is not sure how many miles he will drive in the next two years. Hence, for the purpose of decision, assume that Emil wants to evaluate options of driving 20,000 miles per year, 23,000 miles per year, and 25,000 miles per year. a. What is the decision, and what is the chance event? b. Construct a payoff table for Emil's problem.

The utility function for money is a curve that depicts the relationship between

Reference - 12.1: Use the payoff table given below for a maximization problem to answer questions 18-19. -Reference - 12.1: Which is the recommended decision alternative using the optimistic approach?

The minimax regret approach is

_____ is a measure of the total worth of a consequence reflecting a decision maker's attitude toward considerations such as profit, loss, and risk.

A measure of the outcome of a decision such as profit, cost, or time is known as a _____.

Visual Park is considering marketing one of its two television models for coming Christmas season: Model A or Model B. Model A is a unique featured television and appears to have no competition. Estimated profits (in thousand dollars) under high, medium, and low demand are given below: Visual Park is optimistic about the TV Model B. However, the concern is that profitability will be affected if a competitor launches a TV model which has similar features as Model B. Estimated profits (in thousand dollars) with and without competition is as follows: a. Develop a decision tree for the Visual Park problem. b. For planning purposes, Visual Park believes there is a 0.7 probability that its competitor will launch a TV model similar to Model B. Given this probability of competition, the director of planning recommends marketing the Model A. Using expected value, what is your recommended decision? c. Show a risk profile for your recommended decision. d. Use sensitivity analysis to determine the probability of competition for Model B would have to be for you to change your recommended decision alternative.

The weighted average of the payoffs for a chance node is known as the_____.

For a maximization problem, the conservative approach often is referred to as the _____ approach.

A construction company must decide on the size of the shopping mall, i.e. Large, Medium or Small, that has to be constructed in their acquired plot in the sub-urban area of Seattle. Due to the market conditions, the number of visitors to the mall will be High, Moderate, or Low. The level of response and the size of the mall will decide the return of investment from the mall. The profit payoff table for management (in millions of dollars) after 5 years is provided below. The probabilities for the state of nature are P(High) = 0.35, P(Moderate) = 0.40, and P(Low) = 0.25. a. A test market study of the potential response for the mall in that area is expected to report either a favorable (F) or unfavorable (U) condition. The relevant conditional probabilities are as follows: P(F|High) = 0.35; P(U|High) = 0.65 P(F|Moderate) = 0.45; P(U|Moderate) = 0.55 P(F|Low) = 0.20; P(U|Low) = 0.80 What is the probability that the market research report will be favorable? b. Show the decision tree for this problem.