Exam 6: Decision Making Under Uncertainty

What are the expected payoffs for the three alternatives?

A payoff table lists the monetary values (profit or loss)for each possible _____and each possible _____.

Bayes' Rule is useful for?

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

What should Mrs.Rich do? What is her expected cost in that case?

When the lines for two alternatives cross on a strategy region chart,this shows:

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

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.

The preferred criterion in decision making is.

Utility functions are mathematical functions that transform monetary values - payoffs and costs - into ________________.

Utility function is a function that encodes a person's or company's feelings toward risk.

Construct a decision tree to identify the course of action that maximizes WTC's expected profit.Make sure to label all decision and chance nodes and include appropriate costs,payoffs and probabilities.

The decision maker now has $10,000 and two possible decisions.For Alternative 1,she loses $500 for certain (x=$9,500).For Alternative 2,she loses $0 (x=$10,000)with probability 0.9 and loses $5,000 (x=$5,000)with probability 0.10.Which alternative maximizes the expected utility of her net wealth?

When you use the expected monetary value (EMV)criterion,you are not using all of the information that is shown in the risk profiles of alternatives,since you are only comparing the means.

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

In decision trees,a probability node (a circle)is a time when the decision maker makes a decision.

What is the probability that a randomly selected individual from this population earns less than $50,000 per year?

If there is a 10% chance that one of the decision maker's family heirlooms,valued at $5,000,will be stolen during the next year,what is the most that she would be willing to pay each year for an insurance policy that completely covers the potential loss of her cherished items?

The station is most uncertain about the average monthly revenue associated with the rock format and an A1 audience.Construct a strategy region chart for this input variable with a possible range from $85,000 to $200,000.Does the optimal decision to select the country format change at any point in this range?

Generate a risk profile for each of WTC's possible decisions in this problem.Characterize the differences in risk for the different options.