Exam 21: Decision-Making Tools

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

An operations manager's staff has compiled the information below for four manufacturing alternatives (A, B, C, and D) that vary by production technology and the capacity of the machinery. All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. States of Nature 1 2 3 4 Alternative A 50 55 60 65 Alternative B 30 50 80 130 Alternative C 70 80 70 65 Alternative D -100 -10 150 220 a. Assuming a maximax strategy, which alternative would be chosen? b. If maximin were used, which would be chosen? c. If the states of nature were equally likely, which alternative should be chosen?

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 value? c. How many bundles should be purchased? Demand level Probability 1 bundle 10 percent 2 bundles 30 percent 3 bundles 50 percent 4 bundles 10 percent

The maximin criterion is pessimistic, while the maximax criterion is optimistic.

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

The outcome of an alternative/state of nature combination is a(n)

Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort. The sale of Sno-Cones is highly dependent upon his location and upon the weather. At the resort, he will profit $120 per day in fair weather, $10 per day in bad weather. At home, he will profit $70 in fair weather, $55 in bad weather. Assume that on any particular day, the weather service suggests a 40% chance of foul weather. a. Construct Earl's decision tree. b. What decision is recommended by the expected value criterion?

The expected value with perfect information

The expected monetary value of a decision alternative is the sum of all possible payoffs from the alternative, each weighted by the probability of that payoff occurring.

Define expected monetary value (EMV).

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

The EMV of a decision with three states of nature is $33,000. If the profit/value under the states of nature A, B, and C is $10,000, $20,000, and $50,000 and states B and C have equal probabilities, determine the likelihood of state of nature A.

Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. Develop a decision tree for this situation and indicate which type of truck he should select. States of Nature Alternatives Lower gas prices Gas prices unchanged Higher gas prices probability .3 .5 .2 Subcompact 16,000 19,000 21,000 Compact 15,000 20,000 22,000 Full size 24,000 19,000 6,000

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

The expected value of perfect information (EVPI) is the

A poker player is considering three different options after his opponent bet 200 before him. If the player folds, he will lose instantly. If the player calls, he figures he will win half the time. If he raises he figures that the opposing player will not re-raise him, but rather will either call or fold. He figures the opposing player will call only ¼ of the time, folding the other ¾ of the time. If the opposing player calls his raise, he figures he will never win. The pot size is 1,000 (including the opposing player's bet). a. Draw a decision tree for this scenario including the information provided in part b. b. Suppose that the player is thinking of raising to $400 (he will put in 200 to match the opponent's bet and another 200 as a raise, his opponent would then have to put in 200 more to call the raise). Is this the best option or should he instead call or fold? c. At what raise size is the player's EMV of a raise equivalent to simply calling?

What limitation(s) do decision trees overcome compared to decision tables?