Exam 12: Decision Analysis

Napoleon is contemplating four institutions of higher learning as options for a Masters in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars. School Scenario 1 Scenario 2 Scenario 3 Vanderbilt 95 20 -10 Texas Tech 55 60 60 Seattle 90 10 80 Northeastern State 65 50 60 -Pedro is extremely pessimistic. Which decision making criterion would he naturally select and what conclusion would he recommend to Napoleon? Why?

A dominant decision is one that has a better payoff than another decision under each state of nature.

The ________ is a compromise between the maximax and the maximin criterion.

A conditional probability is the probability that two events will occur simultaneously.

If only one of three events can occur at any given time, the events are ________.

The coefficient of optimism is a measure of the decision maker's optimism.

The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues (in thousands) will vary with how well taxpayers comply with the new tax code. \# of Workers Low Compliance Medium Compliance High Compliance 1 50 50 50 2 100 60 20 3 150 70 -10 -If he thinks the chances of low, medium, and high compliance are 20%, 30%, and 50%, respectively, what is the expected value of perfect information?

Napoleon is contemplating four institutions of higher learning as options for a Masters in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars. School Scenario 1 Scenario 2 Scenario 3 Vanderbilt 95 20 -10 Texas Tech 55 60 60 Seattle 90 10 80 Northeastern State 65 50 60 -Under which decision making criterion is Vanderbilt University the optimal choice?

The quality control manager for ENTA Inc. must decide whether to accept (A1), further analyze (A2), or reject (A3) a lot of incoming material. Assume the following payoff table is available. Historical data indicates that there is 30% chance that the lot is poor quality (S1), 50 % chance that the lot is fair quality (S2), and 20% chance that the lot is good quality (S3). 20 30 90 60 70 10 80 50 40 -What action would you choose according to minimax regret criterion?

The ________ of sample information is the ratio of the expected value of sample information to the expected value of perfect information.

An investor is consider four different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~{ \text { Economic Condition } } \\ \begin{array} { c} \text { Investment } & \begin{array} { c } \text { Poor } \\ \text { (S1) } \end{array} & \begin{array} { c } \text { Average } \\ \left( \mathbf { S } _ { \mathbf { 2 } } \right) \end{array} & \begin{array} { c } \text { Good } \\ \left( \mathbf { S } _ { \mathbf { 3 } } \right) \end{array} & \begin{array} { c } \text { Excellent } \\ \left( \mathbf { S } _ { \mathbf { 4 } } \right) \end{array} \\ \text { A } & 50 & 75 & 20 & 30 \\ \text { B } & 80 & 15 & 40 & 50 \\ \text { C } & - 100 & 300 & - 50 & 10 \\ \text { D } & 25 & 25 & 25 & 25 \end{array} -What decision would be made under minimax regret?

The ________ is the expected value of the regret for each decision.

The ________ minimizes the maximum regret.

A business owner is trying to decide whether to buy, rent, or lease office space and has constructed the following payoff table based on whether business is brisk or slow. Alternative Brisk Slow Buy 90 -10 Rent 70 40 Lease 60 55 If the probability of brisk business is .40 and for slow business is .60, the expected value of perfect information is:

A ________ is one that has a better payoff than another decision under each state of nature.

A ________ decision tree illustrates a situation requiring a series of decisions.

When using decision trees, branches with the greatest expected value are selected.

Napoleon is contemplating four institutions of higher learning as options for a Masters in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars. School Scenario 1 Scenario 2 Scenario 3 Vanderbilt 95 20 -10 Texas Tech 55 60 60 Seattle 90 10 80 Northeastern State 65 50 60 -Under which decision making criterion is Texas Tech University the optimal decision?

A group of friends are planning a recreational outing and have constructed the following payoff table to help them decide which activity to engage in. Assume that the payoffs represent their level of enjoyment for each activity under the various weather conditions. Weather Cold Warm Rainy Bike: Al 10 8 6 Hike: A2 14 15 2 Fish: A3 7 8 9 -If the group chooses to minimize their maximum regret, what activity will they choose?

Expected opportunity loss is the expected value of the regret for each decision.