Deck 3: Decision Analysis

Question 1

The decision theory processes of maximizing expected monetary value (EMV)and minimizing expected opportunity loss (EOL)should lead us to choose the same alternatives.

Answer 1

True

Question 2

The maximum value in a regret table constructed from a decision table populated with cost data corresponds to the optimal alternative.

Answer 2

False

Question 3

All decisions that result in a favorable outcome are considered to be good decisions.

Answer 3

False

Question 4

The EMV approach and Utility theory always result in the same choice of alternatives.

Question 5

Optimistic decision makers tend to discount favorable outcomes.

Question 6

The decision making criterion of realism only applies to maximizing expected payoff.

Question 7

A decision table is sometimes called a payout table.

Question 8

Any problem that can be represented in a decision tree can be easily portrayed in a decision table.

Question 9

The maximin decision criterion is used by pessimistic decision makers and minimizes the maximum outcome for every alternative.

Question 10

The several criteria (maximax, maximin, equally likely, criterion of realism, minimax regret)used for decision making under uncertainty cannot lead the choice of the same alternative.

Question 11

Expected monetary value (EMV)is the payoff you should expect to occur when you choose a particular alternative.

Question 12

Sensitivity analysis assumes no increasing or decreasing economies of scale.

Question 13

Any problem that can be presented in a decision table can also be graphically portrayed in a decision tree.

Question 14

The decision maker can control states of nature.

Question 15

The difference in decision making under uncertainty and decision making under certainty is that under uncertainty, we think we know the probabilities of the states of nature, while under certainty we know exactly the probabilities of the states of nature.

Question 16

Expected monetary value (EMV)is the average or expected monetary outcome of a decision if it can be repeated a large number of times.

Question 17

In a decision table, all of the alternatives are listed down the left side of the table, while all of the possible outcomes or states of nature are listed across the top.

Question 18

The maximax decision criterion is used by pessimistic decision makers and maximizes the maximum outcome for every alternative.

Question 19

EVPI (expected value of perfect information)provides the decision maker a value of the lowest amount she should be willing to pay for additional information.

Question 20

EOL will always result in the same decision as the maximum EMV with revenue data, but will pick the worst alternative with cost data.

Question 21

A pessimistic decision-making criterion is

A)maximax.
B)equally likely.
C)maximin.
D)decision making under certainty.

Question 22

Which of the following is not a characteristic of a good decision?

A)based on logic
B)considers all available data
C)employs appropriate quantitative techniques
D)always results in a favorable outcome

Question 23

The assignment of a utility value of 1 to an alternative implies that the alternative is preferred to all others.

Question 24

A utility curve that shows utility increasing at a decreasing rate as the monetary value increases represents the utility curve of a risk seeker.

Question 25

An analytic and systematic approach to the study of decision making is referred to as

A)decision making under risk.
B)decision making under uncertainty.
C)decision theory.
D)decision analysis.

Question 26

A decision maker is assigning equal probabilities to all states of nature in a decision making under uncertainty situation but is uncomfortable doing so.Therefore, this is actually a decision making under risk situation.

Question 27

Utility theory may help the decision maker include the impact of qualitative factors that are difficult to include in the EMV model.

Question 28

Expected monetary value (EMV)is

A)the average or expected monetary outcome of a decision if it can be repeated a large number of times.
B)the average or expected value of the decision, if you know what would happen ahead of time.
C)the average or expected value of information if it were completely accurate.
D)the amount you would lose by not picking the best alternative.

Question 29

By studying a person's Utility Curve, one can determine whether the individual is a risk seeker, risk avoider, or is indifferent to risk.

Question 30

Utility values typically range from -1 to +1.

Question 31

A second table (an opportunity loss table)must be computed when applying the maximin decision criterion.

Question 32

Utility theory provides a decision criterion that is superior to the EMV or EOL in that it may allow the decision maker to incorporate her own attitudes toward risk.

Question 33

The Laplace criterion represents a compromise between the maximax and maximin decisions.

Question 34

A utility curve that shows utility increasing at an increasing rate as the monetary value increases represents the utility curve of a risk seeker.

Question 35

In a decision problem where we wish to use Bayes' theorem to calculate posterior probabilities, we should always begin our analysis with the assumption that all states of nature are equally likely, and use the sample information to revise these probabilities to more realistic values.

Question 36

What makes the difference between good decisions and bad decisions?

A)A good decision is based on logic.
B)A good decision considers all available data.
C)A good decision considers all alternatives.
D)A good decision applies quantitative approaches.

Question 37

Which of the following is true about the expected value of perfect information?

A)It is the amount you would pay for any sample study.
B)It is calculated as EMV minus EOL.
C)It is calculated as expected value with perfect information minus maximum EMV.
D)It is the amount charged for marketing research.

Question 38

Which of the following is not considered a criterion for decision making under uncertainty?

A)optimistic
B)pessimistic
C)equally likely
D)random selection

Question 39

The following figure illustrates a utility curve for someone who is a risk seeker.

Question 40

The following is a payoff table giving costs for various situations. What decision would an optimist make?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 4

Question 41

Another name for a decision table is a

A)payment table.
B)payout table.
C)payoff table.
D)pay-up table.

Question 42

Which of the following is not one of the steps considered in the "Six Steps in Decision Making"?

A)Clearly define the problem at hand.
B)List the possible alternatives.
C)Apply the model and make your decision.
D)Evaluate the success of the decision.

Question 43

The following is a payoff table giving costs for various situations. What decision would a pessimist make?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 4

Question 44

The following is a payoff table giving costs for various situations. What are the regret values for Alternative 3 as read from State 1 to State 3?

A)17, 16, 25
B)29, 0, 7
C)7, 32, 36
D)23, 65, 91

Question 45

How are decision tables organized?

A)alternatives down the left, states of nature on top, payoffs inside
B)states of nature down the left, alternatives on top, payoffs inside
C)alternatives down the left, payoffs on top, states of nature inside
D)payoffs down the left, alternatives on top, states of nature inside

Question 46

The following is a payoff table giving profits for various situations. The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively.If a perfect forecast of the future were available, what is the expected value of perfect information (EVPI)?

A)166
B)0
C)36
D)40

Question 47

The following is a payoff table giving profits for various situations. The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively.If a perfect forecast of the future were available, what is the expected value with this perfect information?

A)130
B)160
C)166
D)36

Question 48

Pessimistic decision makers tend to

A)magnify favorable outcomes.
B)ignore bad outcomes.
C)discount favorable outcomes.
D)A and B

Question 49

Optimistic decision makers tend to

A)magnify favorable outcomes.
B)ignore bad outcomes.
C)discount favorable outcomes.
D)A and B

Question 50

Nick has plans to open some pizza restaurants, but he is not sure how many to open.He has prepared a payoff table to help analyze the situation. Nick believes there is a 40 percent chance that the market will be good, a 30 percent chance that it will be fair, and a 30 percent chance that it will be poor.A market research firm will analyze market conditions and will provide a perfect forecast (they provide a money back guarantee).What is the most that should be paid for this forecast?

A)$ 44,000
B)$ 53,000
C)$123,000
D)$176,000

Question 51

The following is a payoff table giving profits for various situations. What is the expected value of perfect information?

A)7.6
B)8.4
C)8.8
D)9.2

Question 52

Consider the following payoff table. Based upon these probabilities, a person would select Alternative 3.Suppose there is concern about the accuracy of these probabilities.A few of the analysts feel that the likelihood of State 1 is higher and that the likelihood of State 2 is much lower.If the likelihood of State 2 is reduced at the expense of State 1, how much lower can State 2's likelihood fall before Alternative 3 is no longer optimal?

A)0.05
B)0.06
C)0.07
D)0.08

Question 53

The following is a payoff table giving costs for various situations. What decision should be made based on the minimax regret criterion?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 4

Question 54

The following is a payoff table giving profits for various situations. If a person selected Alternative 1, what would the expected profit be?

A)51.7
B)54.7
C)55.0
D)57.3

Question 55

Consider the following payoff table. How much should be paid for a perfect forecast of the state of nature?

A)170
B)30
C)10
D)100

Question 56

The following is a payoff table giving costs for various situations. What decision should be made based on the Laplace criterion?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 4

Question 57

Nick has plans to open some pizza restaurants, but he is not sure how many to open.He has prepared a payoff table to help analyze the situation. As Nick does not know how his product will be received, he assumes that all three states of nature are equally likely to occur.If he uses the equally likely criterion, what decision would he make?

A)Open 1
B)Open 2
C)Good market
D)Fair market

Question 58

Which of the following is the fourth step of the "Six Steps in Decision Making"?

A)Select one of the mathematical decision theory models.
B)List the possible alternatives.
C)Apply the model and make your decision.
D)List the payoff or profit of each combination of alternatives and outcomes.

Question 59

In decision theory, we call the payoffs resulting from each possible combination of alternatives and outcomes

A)marginal values.
B)conditional values.
C)conditional probabilities.
D)Bayesian values.

Question 60

The following is a payoff table giving profits for various situations. If a person were to use the expected monetary value criterion, what decision would be made?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 4

Question 61

A plant manager considers the operational cost per hour of five machine alternatives.The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm.The following table represents the operations cost per hour for each alternative-state of nature combination: Using the pessimistic criterion, which alternative is best?

A)Machine 2
B)Machine 3
C)Machine 4
D)Machine 5

Question 62

Bayes' theorem enables decision makers to revise probabilities based on

A)perfect information.
B)knowing, ahead of time, the actual outcome of the decision.
C)additional information.
D)measurements of utility.

Question 63

The three decision-making environments are decision making under

A)utility, risk, and certainty.
B)utility, risk, and uncertainty.
C)utility, certainty, and uncertainty.
D)risk, certainty, and uncertainty.

Question 64

In Bayesian analysis, conditional probabilities are also known as which of the following?

A)anterior probabilities
B)posterior probabilities
C)prior probabilities
D)marginal probabilities

Question 65

A plant manager considers the operational cost per hour of five machine alternatives.The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm.The following table represents the operations cost per hour for each alternative-state of nature combination: Using the equally likely criterion, which alternative is best?

A)Machine 1
B)Machine 2
C)Machine 3
D)Machine 4

Question 66

The equally likely criterion is also called the ________ criterion.

A)Hurwicz
B)uncertainty
C)Laplace
D)LaFlore

Question 67

In decision making under ________, there are several possible outcomes for each alternative, and the decision maker does not know the probabilities of the various outcomes.

A)risk
B)utility
C)certainty
D)uncertainty

Question 68

The Hurwicz criterion coefficient of realism measures the decision maker's degree of

A)utility.
B)pessimism.
C)certainty.
D)optimism.

Question 69

The optimistic decision criterion is the criterion of

A)maximax.
B)maximin.
C)realism.
D)equally likely.

Question 70

A plant manager considers the operational cost per hour of five machine alternatives.The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm.The following table represents the operations cost per hour for each alternative-state of nature combination: Assume that for a randomly selected day, there is a 30% probability of cold weather, 50% probability of mild weather, and 20% probability of warm weather.What alternative is best using EMV?

A)Machine 1
B)Machine 2
C)Machine 3
D)Machine 4

Question 71

In the construction of decision trees, which of the following shapes represents a state of nature node?

A)square
B)circle
C)diamond
D)triangle

Question 72

The expected value of sample information (EVSI)can be used to

A)establish a maximum amount to spend on additional information.
B)calculate conditional probabilities.
C)establish risk avoidance.
D)provide points on a utility curve.

Question 73

A plant manager considers the operational cost per hour of five machine alternatives.The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm.The following table represents the operations cost per hour for each alternative-state of nature combination: Assume that for a randomly selected day, there is a 30% probability of cold weather, 50% probability of mild weather, and 20% probability of warm weather.What is the EVPI?

A)$5.8
B)$6.6
C)$1.6
D)$3.2

Question 74

A plant manager considers the operational cost per hour of five machine alternatives.The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm.The following table represents the operations cost per hour for each alternative-state of nature combination: Using the optimistic criterion, which alternative is best?

A)Machine 1
B)Machine 2
C)Machine 3
D)Machine 4

Question 75

A market research survey is available for $10,000.Using a decision tree analysis, it is found that the expected monetary value with no survey is $62,000.If the expected value of sample information is -$7,000, what is the expected monetary value with the survey?

A)$45,000
B)$62,000
C)-$17,000
D)$55,000

Question 76

In the construction of decision trees, which of the following shapes represents a decision node?

A)square
B)circle
C)diamond
D)triangle

Question 77

A company is considering producing a new children's bar soap.A market research firm has told the company that if they perform a survey, a positive survey of a favorable market occurs 65 percent of the time.That is, P(positive survey | favorable market)= 0.65.Similarly, 40 percent of the time the survey falsely predicts a favorable market; thus, P(positive survey | unfavorable market)= 0.40.These statistics indicate the accuracy of the survey.Prior to contacting the market research firm, the company's best estimate of a favorable market was 50 percent.So, P(favorable market)= 0.50 and P(unfavorable market)= 0.50.Using Bayes' theorem, determine the probability of a favorable market given a favorable survey.

A)0.62
B)0.38
C)0.53
D)0.65

Question 78

A decision sciences professor defines the P(A)= the likelihood one of his students will be bitten by a monkey on his trip to India and P(B)= an Indian monkey carries rabies.Which of these expressions represents the likelihood that given a monkey doesn't have rabies, it will bite his student?

A)P(B|A')
B)P(A'|B')
C)P(A|B')
D)P(A'|B)

Question 79

The Hurwicz criterion is also called the criterion of

A)regret.
B)equality.
C)optimism.
D)realism.

Question 80

In decision making under ________, there are several possible outcomes for each alternative, and the decision maker knows the probability of occurrence of each outcome.

A)risk
B)utility
C)certainty
D)probability