Exam 22: Decision Modeling

Which of the following is NOT considered a step in the decision-making process?

What is the difference between the expected payoff under perfect information and the maximum expected payoff under risk?

If a decision maker knows for sure which state of nature will occur,he/she is making a decision under certainty.

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?

Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort.The sale of Sno-Cones is highly dependent upon his location and upon the weather.At the resort,he will profit $110 per day in fair weather,$20 per day in foul weather.At home,he will profit $70 in fair weather,$50 in foul weather.Assume that on any particular day,the weather service suggests a 60% chance of fair weather. a.Construct Earl's payoff table. b.What decision is recommended by the expected monetary value criterion? c.What is the EVPI?

What is the EMV for Option 1 in the following decision table?

What is the outcome of an alternative/state of nature combination called?

If a decision maker has to make a particular decision only once,expected monetary value is a good indication of the payoff associated with the decision.

The following decision tree has how many state of nature nodes?

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?

A(n)________ is a tabular means of analyzing decision alternatives and states of nature.

A toy manufacturer makes stuffed kittens and puppies that have relatively lifelike motions.There are three different mechanisms which can be installed in these "pets." These toys will sell for the same price regardless of the mechanism installed,but each mechanism has its own variable cost and setup cost.Profit,therefore,is dependent upon the choice of mechanism and upon the level of demand.The manufacturer has in hand a forecast of demand that suggests a 0.2 probability of light demand,a 0.45 probability of moderate demand,and a probability of 0.35 of heavy demand.Payoffs for each mechanism-demand combination appear in the table below. Construct the appropriate decision tree to analyze this problem.Use standard symbols for the tree.Analyze the tree to select the optimal decision for the manufacturer.

Expected monetary value is most appropriate for problem solving that takes place:

In a decision tree,a square symbol represents a state of nature node.

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.

A primary advantage of decision trees compared to decision tables is that decision trees:

Bratt's Bed and Breakfast,in a small historic New England town,must decide how to subdivide (remodel)the large old home that will become an inn.There are three alternatives: Option A would modernize all baths and combine rooms,leaving the inn with four suites,each suitable for two to four adults.Option B would modernize only the second floor;the results would be six suites,four for two to four adults,and two for two adults only.Option C (the status quo option)leaves all walls intact.In this case,there are eight rooms available,but only two are suitable for four adults,and four rooms will not have private baths.Below are the details of profit and demand patterns that will accompany each option.Which option has the highest expected value?

An operations manager's staff has compiled the information below for four manufacturing alternatives (E,F,G,and H)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.Forecasts indicate that there is a 0.1 probability of acceptance level 1,0.2 chance of acceptance level 2,0.4 chance of acceptance level 3,and 0.3 change of acceptance level 4. Using the criterion of expected monetary value,which production alternative should be chosen?

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. Calculate the expected monetary value for each decision alternative.Which decision yields the highest EMV?

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 conditional value for the decision alternative "Stock 3" and state of nature "Sell 1"?