Exam 7: Decision Theory– Static

A decision maker's worst option has an expected value of $1,000, and her best option has an expected value of $3,000. With perfect information, the expected value would be $5,000. What is the expected value of perfect information?

The maximin approach to decision making refers to:

Option A has an expected value of $2,000, a minimum payoff of -$4,000, and a maximum payoff of $18,000. Option B has an expected value of $2,200, a minimum payoff of -$1,000, and a maximum payoff of $6,000. Option C has an expected value of $1,900, a minimum payoff of $100, and a maximum payoff of $2,000. In this situation, a risk-averse decision maker would pay __________ for his risk aversion, and a risk-seeking decision maker would pay __________ for his risk seeking.

Which of the following is not an approach for decision making under uncertainty?

Option A has a payoff of $10,000 in environment 1 and $20,000 in environment 2. Option B has a payoff of $5,000 in environment 1 and $27,500 in environment 2. Once the probability of environment 1 exceeds ______, option A becomes the better choice.

Two professors at a nearby university want to coauthor a new textbook in either economics or statistics. They feel that if they write an economics book, they have a 50 percent chance of placing it with a major publisher, and it should ultimately sell about 40,000 copies. If they cannot get a major publisher to take it, then they feel they have an 80 percent chance of placing it with a smaller publisher, with ultimate sales of 30,000 copies. On the other hand, if they write a statistics book, they feel they have a 40 percent chance of placing it with a major publisher, and it should result in ultimate sales of about 50,000 copies. If they cannot get a major publisher to take it, they feel they have a 50 percent chance of placing it with a smaller publisher, with ultimate sales of 35,000 copies. What is the expected value for the decision alternative to write the statistics book?

Consider the following decision scenario: The maximin strategy would be:

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000) will vary depending upon whether passenger demand is low, medium, or high, as follows: If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent respectively, what is the expected annual profit for the bus that he will decide to purchase?

The term "suboptimization" is best described as the:

Consider the following decision scenario: The maximin strategy would be:

The maximax approach is a pessimistic strategy.

Among decision environments, risk implies that certain parameters have probabilistic outcomes.

The advertising manager for Roadside Restaurants, Inc., needs to decide whether to spend this month's budget for advertising on print media, television, or a mixture of the two. She estimates that the cost per thousand "hits" (readers or viewers) will vary depending upon the success of the new cable television network she plans to use, as follows: For what range of probability that the new cable network will be successful will she select the print media strategy?

Option A has a payoff of $10,000 in environment 1 and $20,000 in environment 2. Option B has a payoff of $12,500 in environment 1 and $17,500 in environment 2. Once the probability of environment 2 exceeds ______, option A becomes the better choice.

Decision trees, with their predetermined analysis of a situation, are really not useful in making health care decisions since every person is unique.

Consider the following decision scenario: If yes and no are equally likely, which alternative has the largest expected monetary value?

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows: If he feels the chances of declining, stable, and growing population trends are 40 percent, 50 percent, and 10 percent, respectively, what is his expected value of perfect information?

The advertising manager for Roadside Restaurants, Inc., needs to decide whether to spend this month's budget for advertising on print media, television, or a mixture of the two. She estimates that the cost per thousand "hits" (readers or viewers) will vary depending upon the success of the new cable television network she plans to use, as follows: If she feels that there is a 60 percent chance that the new cable network will be successful, what is her expected cost (per thousand "hits") for the strategy she will select?

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows: If he feels the chances of declining, stable, and growing population trends are 40 percent, 50 percent, and 10 percent, respectively, which kind of houses will he decide to build?

A decision tree is: