Exam 19: Appendix: Decision Analysis

The minimax-regret approach to one-time decisions without event probabilities is neither aggressive nor conservative.

Which of the following is NOT a characteristic of management decisions for which decision analysis techniques apply?

The expected-value concept weighs each payoff for an alternative in proportion to the likelihood that the payoff will occur.

For decisions that are repeated over and over, managers can choose decisions based on the expected payoff that might occur.

List the four elements of a decision problem.

Which of the following statements is TRUE of a decision tree?

Elizabeth, a decision maker has decided to expand her operations and become more efficient. She uses 3 decision variables-d₁ is to do nothing; d₂ is a moderate expansion; and d₃ is a major expansion. a. Determine the expected value of d₂ if the states of nature are S₁ = 0.25; S₂ = 0.60; and S₃ = 0.15. b. Determine the expected value for d₃ if the states of nature are S₁ = 0.25; S₂ = 0.60; and S₃ = 0.15.

A regional fast?food restaurant is considering an expansion program. The major factor influencing the success of such a program is the future level of interest rates. It is estimated that there is a 20 per-cent chance that interest rates will increase by 2 percentage points, a 50 percent chance that they will remain the same, and a 30 percent chance that they will decrease by 2 percentage points. The alternatives they are considering and possible payoffs are shown in the following table: Rates Up Rates Rates Dow1 2 Percent Unchanged 2 Percent Build 50 new places -\ 200,000 \ 50,000 \1 50,000 Build 25 new places -\ 115,000 \ 26,000 \8 0,000 Do nothing -\ 70,000 0 \5 ,000 a. Using decision tree analysis, what is the expected value (EV) for building 50 new restaurants? b. Using decision tree analysis, what is the expected value (EV) for building 25 new restaurants? c. What is the action and corresponding expected value EV for this overall decision tree problem?

Describe how the following criteria are applied to a decision problem in which the object is maximization. a.Maximax b.Maximin c.Minimax regret

With an unstable economy, it is difficult to predict actual demand for a product.

A company is expanding its production capacity. The decision will depend upon whether the increase in demand is low, medium, or high. The company's choices for expansion are small, medium, large, or very large. The following table provides an estimate of profits over the next two years. Demand Values Decision Low Medium High Small Expansion \ 5,000 \ 10,000 \ 10,000 Medium Expansion \ 2,000 \ 12,000 \ 14,000 Large Expansion 0 \ 6,000 \ 13,000 Very Large Expansion \ 5,000 \ 8,000 \ 20,000 a. Which decision variable would be selected using maximax? b. Which decision variable would be selected using maximin? c. Which decision variable would be selected using minimax-regret criteria? d. Suppose the decision maker assigns the probability of low demand as 0.2, medium demand as 0.5, and high demand as 0.3. Which decision variable would be selected using the expected value criterion?

For _____, managers must take into account the risk associated with making the wrong decision.

Discuss the five characteristics of management decisions when decision analysis techniques should be utilized.

A model that starts with the future-most point and moves toward the current time period is called a _____.

Making decisions in an emergency room of a hospital is an example of a decision analysis situation.

A major retail clothing store is considering whether to open a new store on the other side of town or wait for one year and then open the store. In the meantime, they have paid $10,000 for one year option on a building. If they open the store now it will cost $140,000 to refurbish it, but it will cost $160,000 if they wait one year. They expect sales to depend on the economy in the area at the time they open the store. If they go ahead now, there is a 50% chance the economy will go up, 30% it will stay the same, and 20% it will go down. They then expect the following returns: if the economy goes up $200,000; stays the same $160,000; and goes down ?$20,000.If they wait one year, they can either open the store then or not open the store and let the option expire. If the option expires, they will lose the $10,000. One year from now they expect there is a 40% chance the economy will go up, 30% stay the same, and 30% go down. The returns they expect to get would then be: if the economy goes up $180,000; stays the same $160,000; and goes down ?$30,000. a. Using decision tree analysis, what is the expected value (EV) of opening the store now? b. Using decision tree analysis, what is the expected value (EV) of waiting one year to open the store? c. What should the company do and what is the expected value (EV) of that decision?

Given the following table, calculate the expected value of perfect information. Low Medium High Expected Demand Demand Demand Value Small \ 400 \ 400 \ 400 \ 400 Medium \ 100 \ 600 \ 600 \ 500 Large \ 300 \ 300 \ 900 \ 450 Probability 0.20 0.35 0.45

Decision analysis situations often have multiple objectives.

Which of the following statements is TRUE of the expected-value approach to selecting decision alternatives?

A numerical value associated with a decision coupled with some event is called a decision tree.