Exam 6: Decision Making Under Uncertainty

In decision trees,time:

In making decisions,we choose the decision with the largest expected monetary value.

The expected value of perfect information (EVPI)is equal to:

What impact,if any,does the insurance deductible amount have on her decision? Briefly explain your answer

In a single-stage decision tree problem,all ___________ are made first and then all ___________ is (are)resolved.

Which of the following statements are true?

Since the core test can only sample a small part of the mine,Southport's geologists believe it is somewhat unrealistic to view it as a perfectly reliable test.Based on similar tests they have conducted in the past,they believe that if the metallurgical properties of the ore are actually High Grade,then the probability that this test will return "favorable" results is 0.95.If the metallurgical properties are Low Grade,the probability that this test will return "favorable" results is only 0.25.Otherwise,the test results will be considered "unfavorable".Given this information,what are the posterior probabilities that the ore will be a High Grade and Low Grade,given the core test report?

In a multistage decision problem,decisions and outcomes alternate.That is,a decision maker makes a decision,then some uncertainty is resolved,then the decision maker makes a second decision,then some further uncertainty is resolved,and so on.

Suppose that an actual (not perfectly reliable)market research report has the following characteristics based on historical data: if the program is actually going to be a hit,there is a 90% chance that the market researchers will predict the program to be a hit,and if the program is actually going to be a flop,there is a 20% chance that the market researchers will predict the program to be a hit.Given this information,what are the posterior probabilities that a show will be a hit or a flop,given the market research report?

Which of these sensitivity analysis charts is most useful in determining whether the optimal decision changes over the range of the input variable?

The network can conduct market research to determine whether a program will be a hit or a flop.If the market research report is perfectly reliable,what is the most the network should be willing to pay for it?

With regard to decision making,most individuals are __________________.

The expected value of perfect information (EVPI)is irrelevant concept since perfect information is almost never available at any price.

(A)Construct a decision tree to help the landowner make her decision.Make sure to label all decision and chance nodes and include appropriate costs,payoffs and probabilities. (B)What should the landowner do? Why? (C)Suppose the landowner is uncertain about the reliability of her geologist friend's estimate of the probability that oil will be found on her land.If she thinks the probability could be anywhere between 40% and 80%,would that change her decision? (D)Suppose that,in addition to the uncertainty about the probability of finding oil,the landowner is also uncertain about the cost of the exploratory well (could vary +/- 25%)and the future profits (could vary +/- 50%).To which of these variables is the expected value most sensitive? (E)What does the risk profile show about the relative risk levels for the landowner's two options? (F)Suppose the landowner suspects that she may be a somewhat risk-averse decision maker,because the she doesn't feel there is as much of a difference between the two options as their expected values would indicate.She consults with a decision analysis expert who asks her to decide between two hypothetical alternatives: 1)a gamble with equal probabilities of winning an amount $X and losing an amount -$X/2,and 2)doing nothing,with a payoff of $0.The point at which she cannot decide between 1)and 2)is when X=$1,500,000.What is her risk tolerance if she uses an exponential utility function to model her preferences? (G)Apply the risk tolerance given in your answer to the previous question to the landowner's decision tree in (A).What is the optimal decision in this case? What is the resulting certainty equivalent? (H)If the landowner could hire an expert geologist prepare a report to help her make her decision,what is the most that information could be worth? Assume the geologist's information is perfectly reliable.

(A)Construct a decision tree to help her model her option decision making.Make sure to label all decision and chance nodes and include appropriate costs,payoffs and probabilities. (B)What is the optimal decision making policy regarding the options in all possible scenarios over the next two years? (C)What is the expected value of the stock options? Ignore the time value of money (assume no discounting of future payoffs) (D)If her estimates of the increases/decreases or probabilities are inaccurate,could the options have a negative EMV?

If a randomly selected individual is observed to earn less than $50,000 per year,what is the probability that this person is a woman?

The expected value of perfect information (EVPI)is the difference between the EMV with perfect information and the EMV with no additional information.

For each possible decision and each possible outcome,the payoff table lists the monetary value earned by an organization,where a positive value represents a profit and a negative value represents a loss.

Formulate a payoff table that specifies the contribution to profit (in dollars)from the sales of footballs by this chain for each possible purchase decision (in hundreds of pairs)and each outcome with respect to consumer demand.

A risk profile lists: