Exam 22: Decision-Making Tools

Miles is considering buying a new pickup truck for his lawn service firm.The economy in town seems to be growing,and he is wondering whether he should opt for a subcompact,compact,or full-size pickup truck.The smaller truck would have better fuel economy,but would sacrifice capacity and some durability.A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year,a 20% chance of higher gas prices,and a 50% chance that gas prices will stay roughly unchanged.Based on this information,Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.Develop a decision tree for this situation and indicate which type of truck he should select.

A decision maker who uses the maximin criterion when solving a problem under conditions of uncertainty is:

If a decision maker can assign probabilities of occurrences to the states of nature,then the decision-making environment is Decision Making under Uncertainty.

A square node on a decision tree infers that:

Doing nothing would yield how much profit if favorable market conditions prevail according to the following profit decision table?

What are decision tables?

The expected value of perfect information is the same as the expected value with perfect information.

A retailer is deciding how many units of a certain product to stock.The historical probability distribution of sales for this product is 0 units,0.2;1 unit,0.3;2 units,0.4,and 3 units,0.1.The product costs $8 per unit and sells for $25 per unit.What is the largest conditional value (profit)in the entire payoff table for this scenario?

An operations manager's staff has compiled the information below for four manufacturing alternatives (A,B,C,and D)that vary by production technology and the capacity of the machinery.All choices enable the same level of total production and have the same lifetime.The four states of nature represent four levels of consumer acceptance of the firm's products.Values in the table are net present value of future profits in millions of dollars. a.Assuming a maximax strategy,which alternative would be chosen? b.If maximin were used,which would be chosen? c.If the states of nature were equally likely,which alternative should be chosen?

The expected monetary value of a decision alternative is the sum of all possible payoffs from the alternative,each weighted by the probability of that payoff occurring.

The campus bookstore sells stadium blankets embroidered with the university crest.The blankets must be purchased in bundles of one dozen each.Each blanket in the bundle costs $65,and will sell for $90.Blankets unsold by homecoming will be clearance priced at $20.The bookstore estimates that demand patterns will follow the table below. a.Build the decision table. b.What is the maximum expected monetary value? c.How many bundles should be purchased?

What is the expected value of perfect information of the following decision table?

________ is the criterion for decision making under uncertainty that assigns equal probability to each state of nature.

All EXCEPT which of the following steps are taken to analyze problems with decision trees?

The EMV of a decision with three states of nature is $50.If the profit/value of A is 1/3 of B and B is 1/3 of C,determine the profit from A if all three states of nature are equally likely to occur.

A decision tree is a(n):

The campus bookstore sells highlighters that it purchases by the case.Cost per case,including shipping and handling,is $200.Revenue per case is $350.Any cases unsold will be discounted and sold at $175.The bookstore has estimated that demand will follow the pattern below a.Construct the bookstore's payoff table. b.How many cases should the bookstore stock in order to maximize expected profit? c.How would your answer differ if the clearance price were not $175 per case but $225 per case? (It is not necessary to re-solve the problem to answer this. )

Explain the symbols used in decision tree analysis.

A do-it-yourself homeowner is installing a new toilet.While installing the toilet he must decide on what kind of connecting pipe he will install to the water supply.There are two available options,one that has a shut-off valve in case of a leak and a cheaper one without the shut-off valve.Suppose that the shut-off valve pipe costs an extra ten dollars and that the homeowner must buy one of the two. a.Draw a decision tree for this scenario,labeling the cost of a leak as X and the chance of a leak as P. b.If the chance of a leak causing household damage is 1%,at what $ amount of household damage is the owner neutral on which pipe to buy? c.If the cost of a leak would be $10,000 what is the maximum % chance to leak at which the homeowner would prefer to buy the cheaper pipe? d.If the cost of a leak is $1,000 and the chance to flood .1% which pipe should the homeowner buy?

What is the EMV for Option 2 in the following decision table?