Exam 20: An Introduction to Decision Theory

A state of nature is an uncertain, future event.

The national sales manager for "I colored this" (ICT) T-shirts provides all salespersons with the payoff table shown next, giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing three dozen T-shirts?

In decision theory, a payoff is expressed as a profit or a ______.

Of the three components in any decision-making situation, which of the following cannot be controlled?

What is the practical value of knowing the value of perfect information?

A person is trying to decide if they should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner, the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature), the person finds that the probability of winning is 0.001. Based on this information, the following payoff table can be constructed: Based on the expected monetary value of buying a ticket, what is the best decision?

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects to sell between six and nine of them. What is the payoff value for the purchase of nine watermelons when the demand is for nine watermelons?

The national sales manager for "I colored this" (ICT) T-shirts provides all salespersons with the following opportunity loss table showing the potential lost profit for each purchase decision or act from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. How many dozen T-shirts should you purchase based on minimizing the expected opportunity loss?

A person is trying to decide if they should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner, the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature), the person finds that the probability of winning is 0.001. Based on this information, the following payoff table can be constructed: What is the expected monetary value of buying the ticket?

You have four different strategic business plans you can select to implement against your competitors. You estimate that the probability that the competitors are aware of your strategies is 0.3, and 0.7 that they are unaware. The payoffs estimated for each scenario are shown next. What is the minimax choice?

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects to sell between six and nine of them. What is the payoff value for the purchase of eight watermelons when the demand is for seven watermelons?

An expected opportunity loss can only be greater than or equal to zero.

In decision making, if there are one or more unknown factors, then the decision is made under conditions of uncertainty.

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects to sell between six and nine of them. What is the payoff value for the purchase of six watermelons when the demand is for seven or more watermelons?

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects to sell between six and nine of them. What is the payoff value for the purchase of seven watermelons when the demand is for six watermelons?

You have four different strategic business plans you can select to implement against your competitors. You estimate that the probability that the competitors are aware of your strategies is 0.3, and 0.7 that they are unaware. The payoffs estimated for each scenario are shown next. What is the maximax choice?

A decision maker's course of action results in a consequence or payoff.

In decision theory, an uncertain future outcome is called a ____________________.

The national sales manager for "I colored this" (ICT) T-shirts provides all salespersons with the payoff table shown next, giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the maximum payoff under conditions of certainty?

Sensitivity analysis examines the effects that changes in the probabilities for the states of nature have on the expected values of the alternatives or acts, and the corresponding decisions.