Question 1

For each possible decision and each possible outcome, the payoff table lists the associated monetary value.

Accepted Answer

A) True 
 B)False  True

Question 2

Bayes' rule is used for updating the probability of an uncertain outcome after observing the results of a test or study.

Accepted Answer

A) True 
 B)False  True

Question 3

Exhibit 9-2A customer has approached a local credit union for a $20,000 1-year loan at a 10% interest rate. If the credit union does not approve the loan application, the $20,000 will be invested in bonds that earn a 6% annual return. Without additional information, the credit union believes that there is a 5% chance that this customer will default on the loan, assuming that the loan is approved. If the customer defaults on the loan, the credit union will lose the $20,000.
  
-Refer to Exhibit 9-2. Construct a decision tree to help the credit union decide whether or not to make the loan. Make sure to label all decision and chance nodes and include appropriate costs, payoffs and probabilities.

Accepted Answer

The answer of Exhibit 9-2A customer has approached a local...

Question 4

All problems related to decision making under uncertainty have three common elements:

Accepted Answer

A) the mean, median, and mode 
B) the set of decisions, the cost of each decision and the profit that can be made from each decision 
C) the set of possible outcomes, the set of decision variables and the constraints 
D) the set of decisions, the set of possible outcomes, and a value model that prescribes results 
A) the mean, median, and mode 
B) the set of decisions, the cost of each decision and the profit that can be made from each decision 
C) the set of possible outcomes, the set of decision variables and the constraints 
D) the set of decisions, the set of possible outcomes, and a value model that prescribes results

Question 5

Exhibit 9-1A farmer must decide whether to take protective action to limit damage to his grapefruit crop in the event that the overnight temperature falls to a level well below freezing. If the temperature drops too low he runs the risk of losing his entire crop, valued at $75,000. Based on the National Weather Service, the probability of such a temperature drop is 60%. He can insulate his crop by spraying water on all the trees, which will cost $20,000. This action might succeed in protecting the crop, with the following possible outcomes:
 $$\begin{array} { l l } 
\text { Probability } & \text { Damage } \
0.30 & \$ 0 \
0.15 & \$ 5,000 \
0.10 & \$ 10,000 \
0.15 & \$ 15,000 \
0.30 & \$ 20,000
\end{array}$$
-Refer to Exhibit 9-1. Find the highest cost of insulating the grapefruits for which the farmer prefers to insulate his crop.

Accepted Answer

By trial and error (or by look

Question 6

Exhibit 9-2A customer has approached a local credit union for a $20,000 1-year loan at a 10% interest rate. If the credit union does not approve the loan application, the $20,000 will be invested in bonds that earn a 6% annual return. Without additional information, the credit union believes that there is a 5% chance that this customer will default on the loan, assuming that the loan is approved. If the customer defaults on the loan, the credit union will lose the $20,000.
  
-Refer to Exhibit 9-2. The bank can thoroughly investigate the customer's credit record and obtain a favorable or unfavorable recommendation. If the credit report is perfectly reliable, what is the most the credit union should be willing to pay for the report?

Accepted Answer

The tree above shows that if the credit

Question 7

Exhibit 9-2A customer has approached a local credit union for a $20,000 1-year loan at a 10% interest rate. If the credit union does not approve the loan application, the $20,000 will be invested in bonds that earn a 6% annual return. Without additional information, the credit union believes that there is a 5% chance that this customer will default on the loan, assuming that the loan is approved. If the customer defaults on the loan, the credit union will lose the $20,000.
  
-Refer to Exhibit 9-2. Suppose that an actual (not perfectly reliable) credit report has the following characteristics based on historical data; in cases where the customer did not default on the approved loan, the probability of receiving a favorable recommendation on the basis of the credit investigation was 80%, while in cases where the customer defaulted on the approved loan, the probability of receiving a favorable recommendation on the basis of the credit investigation was 25%. Given this information, what are the posterior probabilities that default will and will not occur, given the credit report?

Accepted Answer

@#IMG-DLM& The worksheet above shows that if the r

Question 8

Which of the following statements is true concerning decision tree conventions?

Accepted Answer

A) Time proceeds from right to left. 
B) The trees are composed of circles, triangles and ovals. 
C) The nodes represent points in time. 
D) Probabilities of outcomes are shown to the right of the end nodes. 
A) Time proceeds from right to left. 
B) The trees are composed of circles, triangles and ovals. 
C) The nodes represent points in time. 
D) Probabilities of outcomes are shown to the right of the end nodes.

Question 9

Prior probabilities are sometimes called likelihoods, the probabilities that are influenced by information about the outcome of an earlier uncertainty.

Accepted Answer

A) True 
 B)False

Question 10

In general, the expected monetary value (EMV) of a decision will be equal to one of the possible payoffs.

Accepted Answer

A) True 
 B)False

Question 11

Bayes' rule is used to:

Accepted Answer

A) update the prior probabilities once new information is observed. 
B) turn the given conditional probabilities (i.e. likelihoods) around. 
C) update the posterior probabilities once new information is observed. 
D) All of the above are uses for Bayes' rule. 
A) update the prior probabilities once new information is observed. 
B) turn the given conditional probabilities (i.e. likelihoods) around. 
C) update the posterior probabilities once new information is observed. 
D) All of the above are uses for Bayes' rule.

Question 12

Exhibit 9-1A farmer must decide whether to take protective action to limit damage to his grapefruit crop in the event that the overnight temperature falls to a level well below freezing. If the temperature drops too low he runs the risk of losing his entire crop, valued at $75,000. Based on the National Weather Service, the probability of such a temperature drop is 60%. He can insulate his crop by spraying water on all the trees, which will cost $20,000. This action might succeed in protecting the crop, with the following possible outcomes:
 $$\begin{array} { l l } 
\text { Probability } & \text { Damage } \
0.30 & \$ 0 \
0.15 & \$ 5,000 \
0.10 & \$ 10,000 \
0.15 & \$ 15,000 \
0.30 & \$ 20,000
\end{array}$$
-Refer to Exhibit 9-1. Construct a decision tree to help the farmer make his decision. What should he do? Explain your answer.

Accepted Answer

The solved decision tree below

Question 13

The strategy region graph is a type of sensitivity analysis chart that:

Accepted Answer

A) is useful in determining whether the optimal decision changes over the range of the input variable. 
B) ranks the sensitivity of the EMV to the input variables. 
C) reflects how the value of information changes over a range of probabilities. 
D) None of these 
A) is useful in determining whether the optimal decision changes over the range of the input variable. 
B) ranks the sensitivity of the EMV to the input variables. 
C) reflects how the value of information changes over a range of probabilities. 
D) None of these

Question 14

The solution procedure for solving decision trees is called:

Accepted Answer

A) sensitivity analysis 
B) policy iteration 
C) risk profiling 
D) folding back 
A) sensitivity analysis 
B) policy iteration 
C) risk profiling 
D) folding back

Question 15

The denominator of Bayes' rule:

Accepted Answer

A) is the same as the simple probability of an outcome O. 
B) decomposes the probability of the new information I into all possibilities. 
C) is sometimes called the law of complementary probabilities. 
D) is unique for each possible outcome. 
A) is the same as the simple probability of an outcome O. 
B) decomposes the probability of the new information I into all possibilities. 
C) is sometimes called the law of complementary probabilities. 
D) is unique for each possible outcome.

Question 16

The expected monetary value (EMV) criterion represents the long-run average of uncertain outcomes, so it should only be used for recurring decisions.

Accepted Answer

A) True 
 B)False

Question 17

The risk profile shows the probability distribution of monetary outcomes in both graphical and tabular form.

Accepted Answer

A) True 
 B)False

Question 18

Exhibit 9-2A customer has approached a local credit union for a $20,000 1-year loan at a 10% interest rate. If the credit union does not approve the loan application, the $20,000 will be invested in bonds that earn a 6% annual return. Without additional information, the credit union believes that there is a 5% chance that this customer will default on the loan, assuming that the loan is approved. If the customer defaults on the loan, the credit union will lose the $20,000.
  
-Refer to Exhibit 9-2. Should the credit union purchase the report if it costs $150?

Accepted Answer

The tree above shows that the credit rep

Question 19

For a risk averse decision maker, the certainty equivalent is less than the expected monetary value (EMV).

Accepted Answer

A) True 
 B)False

Question 20

Exhibit 9-1A farmer must decide whether to take protective action to limit damage to his grapefruit crop in the event that the overnight temperature falls to a level well below freezing. If the temperature drops too low he runs the risk of losing his entire crop, valued at $75,000. Based on the National Weather Service, the probability of such a temperature drop is 60%. He can insulate his crop by spraying water on all the trees, which will cost $20,000. This action might succeed in protecting the crop, with the following possible outcomes:
 $$\begin{array} { l l } 
\text { Probability } & \text { Damage } \
0.30 & \$ 0 \
0.15 & \$ 5,000 \
0.10 & \$ 10,000 \
0.15 & \$ 15,000 \
0.30 & \$ 20,000
\end{array}$$
-Refer to Exhibit 9-1. Construct a risk profile and from that determine the probability that no additional cost is incurred if the decision to insulate at a cost of $20,000 is made.

Accepted Answer

The risk profile is shown belo

For each possible decision and each possible outcome, the payoff table lists the associated monetary value.

Bayes' rule is used for updating the probability of an uncertain outcome after observing the results of a test or study.

All problems related to decision making under uncertainty have three common elements:

Which of the following statements is true concerning decision tree conventions?

Prior probabilities are sometimes called likelihoods, the probabilities that are influenced by information about the outcome of an earlier uncertainty.

In general, the expected monetary value (EMV) of a decision will be equal to one of the possible payoffs.

Bayes' rule is used to:

The strategy region graph is a type of sensitivity analysis chart that:

The solution procedure for solving decision trees is called:

The denominator of Bayes' rule:

The expected monetary value (EMV) criterion represents the long-run average of uncertain outcomes, so it should only be used for recurring decisions.

The risk profile shows the probability distribution of monetary outcomes in both graphical and tabular form.

For a risk averse decision maker, the certainty equivalent is less than the expected monetary value (EMV).

Introduction to Modeling

Introduction to Spreadsheet Modeling

Introduction to Optimization Modeling

Linear Programming Models

Network Models

Optimization Models With Integer Variables

Nonlinear Optimization Models

Evolutionary Solver: An Alternative Optimization Procedure

Introduction to Simulation Modeling

Simulation Models

Inventory and Supply Chain Models

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Regression and Forecasting Models

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Exam 9: Decision Making Under Uncertainty

For each possible decision and each possible outcome, the payoff table lists the associated monetary value.

Bayes' rule is used for updating the probability of an uncertain outcome after observing the results of a test or study.

All problems related to decision making under uncertainty have three common elements:

Which of the following statements is true concerning decision tree conventions?

Prior probabilities are sometimes called likelihoods, the probabilities that are influenced by information about the outcome of an earlier uncertainty.

In general, the expected monetary value (EMV) of a decision will be equal to one of the possible payoffs.

Bayes' rule is used to:

The strategy region graph is a type of sensitivity analysis chart that:

The solution procedure for solving decision trees is called:

The denominator of Bayes' rule:

The expected monetary value (EMV) criterion represents the long-run average of uncertain outcomes, so it should only be used for recurring decisions.

The risk profile shows the probability distribution of monetary outcomes in both graphical and tabular form.

For a risk averse decision maker, the certainty equivalent is less than the expected monetary value (EMV).

Introduction to Modeling

Introduction to Spreadsheet Modeling

Introduction to Optimization Modeling

Linear Programming Models

Network Models

Optimization Models With Integer Variables

Nonlinear Optimization Models

Evolutionary Solver: An Alternative Optimization Procedure

Introduction to Simulation Modeling

Simulation Models

Inventory and Supply Chain Models

Queuing Models

Regression and Forecasting Models

Filters