Exam 18: Decision Theory

Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt.The level of demand affects the success of both strategies.The states of nature (S_I)represent the levels of demand for the company products.s₁,s₂,and s₃ characterize high,medium,and low demand,respectively.The payoff values are in thousands of dollars. The management believes that weather conditions significantly affect the level of demand.48 monthly sales reports are randomly selected.These monthly sales reports show 15 months with high demand,28 months with medium demand,and 5 months with low demand.12 of the 15 months with high demand had favorable weather conditions.14 of the 28 months with medium demand had favorable weather conditions.Only 1 of the 5 months with low demand had favorable weather conditions.What is the probability that weather conditions are poor,given that the demand is high? What is the probability that weather conditions are poor,given that the demand is medium? What is the probability that weather conditions are poor,given that the demand is low?

A set of potential future conditions that will have an effect on the results of a decision is called the states of nature.

Maximax is a criterion used when making decisions under __________________.

The _____________ criterion is best used when a large number of similar decisions will be made.

A person's utility is determined by the preferences he/she exhibits for decision choices involving __________.

The __________________ criterion is preferred by optimistic decision makers.

The _______________________is the difference between the expected payoff that would have been realized had the best alternative action been selected if we knew which state of nature would occur and the expected payoff under risk.

Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt.The level of demand affects the success of both strategies.The states of nature (S_I)represent the levels of demand for the company products.S₁,S₂,and S₃ characterize high,medium,and low demand,with probabilities of .3,.6,and .1,respectively.The payoff values are in thousands of dollars. Find the expected monetary value for each of the alternatives and determine the best alternative (course of action)for the EKA manufacturing company using the expected monetary value criterion.

An investor is looking at three possible investments: growth stock,blue chip stock,or municipal bonds.The investment performance will vary depending on the investment market condition of bull (market rising),flat,or bear (market falling).The investment return for each investment for the corresponding market conditions is given below. Which investment would the investor select if using the maximin criterion?

Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt.The level of demand affects the success of both strategies.The states of nature (S_I)represent the levels of demand for the company products.S₁,S₂,and S₃ characterize high,medium,and low demand,respectively.The payoff values are in thousands of dollars. The management believes that weather conditions significantly affect the level of demand.48 monthly sales reports are randomly selected.These monthly sales reports show 15 months with high demand,28 months with medium demand,and 5 months with low demand.12 of the 15 months with high demand had favorable weather conditions.14 of the 28 months with medium demand had favorable weather conditions.Only 1 of the 5 months with low demand had favorable weather conditions.Based on this information,the prior probabilities have been revised.If the weather conditions are favorable,P(S₁)= .4286,P(S₂)= .5357,and P(S₃)= .0357;and if the weather conditions are poor,P(S₁)= .1364,P(S₂)= .6818,and P(S₃)= .1818.It is also determined that the probability of favorable weather is 0.56 and the probability of poor weather is 0.44.Determine the expected value of sample information.What is the maximum amount that the company is willing to pay for the weather information and the additional analysis?

In a decision-making situation,the maximum amount of money that should be spent to obtain perfect information is called the ______________________________.

The __________________ criterion is preferred by pessimistic decision makers.

A decision maker's expected utility is based upon his/her attitude toward risk.

Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt.The level of demand affects the success of both strategies.The states of nature (S_I)represent the levels of demand for the company products.S₁,S₂,and S₃ characterize high,medium,and low demand,with probabilities of .3,.6,and .1,respectively.The payoff values are in thousands of dollars. The management believes that the weather conditions significantly affect the level of demand.48 monthly sales reports are randomly selected.These monthly sales reports show 15 months with high demand,28 months with medium demand,and 5 months with low demand.12 of the 15 months with high demand had favorable weather conditions.14 of the 28 months with medium demand had favorable weather conditions.Only 1 of the 5 months with low demand had favorable weather conditions.What is the maximum amount that the company would be willing to pay for perfect information?

When the maximin criterion is used,the decision maker assumes that for any alternative action,the state of nature with the maximum payoff will take place.

A tire manufacturer needs to determine the amount of production for the coming month (high vs.low).The level of production largely depends on the level of demand.For this situation,the amount of production constitutes the ___________________ actions.

The _____________criterion finds the best-possible payoff for each alternative and then chooses the alternative that yields the maximum best-possible payoff.

The _____________criterion finds the worst-possible payoff for each alternative and then chooses the alternative that yields the maximum worst-possible payoff.

When making a decision in an environment of ________________,the decision maker knows which of the states of nature will actually occur.

Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt.The level of demand affects the success of both strategies.The states of nature (S_I)represent the levels of demand for the company products.S₁,S₂,and S₃ characterize high,medium,and low demand,respectively.The payoff values are in thousands of dollars. The management believes that weather conditions significantly affect the level of demand.48 monthly sales reports are randomly selected.These monthly sales reports show 15 months with high demand,28 months with medium demand,and 5 months with low demand.12 of the 15 months with high demand had favorable weather conditions.14 of the 28 months with medium demand had favorable weather conditions.Only 1 of the 5 months with low demand had favorable weather conditions.Construct the revised probability table for favorable weather conditions,and find the probability of high demand given that the weather conditions are favorable.