Exam 20: An Introduction to Decision Theory

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. Based on a maximin decision strategy, what alternative is selected?

An expected monetary value can only be greater than or equal to zero.

A way to decide which common stock to purchase is to determine the profit that might be lost because the exact state of nature (the market behavior) was not known at the time the investor bought the stock. This potential loss is called opportunity loss or regret.

The ___________ decision-making strategy maximizes the minimum gain.

The potential loss for an uncertain state of nature is called a ________________.

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 value of perfect information?

You have a decision to invest $10,000 in any of four different companies. You estimate the probabilities that the economy will be favorable or unfavorable, and you estimate the percent returns over the next year. What is the expected value for Company 1?

A student is planning a trip home for the holidays and has three options: car, train, or jet. The decision depends on if the weather is good or bad. In addition, the student estimated the costs for each option. The payoff table follows. What is the value of perfect information?

A person is trying to decide if they should buy a lottery ticket. The ticket costs $1.00. If the ticket is a winner, the prize would be $10,000. Knowing that winning $10,000 is not a certain outcome (state of nature), the person finds that the probability of winning is 0.0009. Based on this information, the following payoff table can be constructed. What is the decision using a maximax or optimistic approach?

To compute an expected monetary value, it requires that ______________ are estimated for each state of nature.

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 maximin choice?

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 value of perfect information?

A person is trying to decide if they should buy a lottery ticket. The ticket costs $1.00. If the ticket is a winner, the prize would be $10,000. Knowing that winning $10,000 is not a certain outcome (state of nature), the person finds that the probability of winning is 0.0009. Based on this information, the following payoff table can be constructed. What is the expected monetary value of buying the ticket?

In a payoff table, another name for alternatives is _______.

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 seven watermelons?