Deck 17: Decision Making

Question 1

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.5, what is the EVPI for the payoff table?

A) 3
B) 11
C) -3
D) 8

Answer 1

3

Question 2

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.5, what is the optimal alternative using EMV?

A) A1
B) A2
C) A3
D) It cannot be determined.

Answer 2

A1

Question 3

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses, respectively, what is the EMV for buying 200 dozen roses?

A) $4,500
B) $1,700
C) $1,000
D) $2,500

Answer 3

$1,700

Question 4

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.5, what is the return to risk ratio for A1?

A) 0.667
B) 4.333
C) 1.5
D) 2

Question 5

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. What is the number of states of nature for the payoff table?

A) 2
B) 3
C) 4
D) It cannot be determined.

Question 6

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. What is the payoff for buying 200 dozen roses and selling 100 dozen roses at the full price?

A) $2,000
B) $500
C) -$500
D) $1,000

Question 7

Look at the utility function graphed below and select the type of decision maker that corresponds to the graph.

A) risk taker
B) risk player
C) risk neutral
D) risk averter

Question 8

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.5, what is the coefficient of variation for A2?

A) 0.231
B) 2
C) 1.5
D) 0.5

Question 9

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. What is the opportunity loss for buying 200 dozen roses and selling 100 dozen roses at the full price?

A) -$500
B) $1,000
C) $500
D) -$2,000

Question 10

A company that manufactures designer jeans is contemplating whether to increase its advertising budget by $1 million for next year. If the expanded advertising campaign is successful, the company expects sales to increase by $1.6 million next year. If the advertising campaign fails, the company expects sales to increase by only $400,000 next year. If the advertising budget is not increased, the company expects sales to increase by $200,000. Identify the outcomes in this decision-making problem.

A) two possibilities: (1) campaign is successful and (2) campaign is not successful
B) the increase in sales dollars next year
C) four consequences resulting from the Increase/Do Not Increase and Successful/Not Successful combinations
D) two choices: (1) increase the budget and (2) do not increase the budget

Question 11

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.2, what is the optimal alternative using EOL?

A) A2
B) A3
C) A1
D) It cannot be determined.

Question 12

A company that manufactures designer jeans is contemplating whether to increase its advertising budget by $1 million for next year. If the expanded advertising campaign is successful, the company expects sales to increase by $1.6 million next year. If the advertising campaign fails, the company expects sales to increase by only $400,000 next year. If the advertising budget is not increased, the company expects sales to increase by $200,000. Identify the objective variable in this decision-making problem.

A) two choices: (1) increase the budget and (2) do not increase the budget
B) four consequences resulting from the Increase/Do Not Increase and Successful/Not Successful combinations
C) two possibilities: (1) campaign is successful and (2) campaign is not successful
D) the increase in sales dollars next year

Question 13

TABLE 17-2
The following payoff matrix is given in dollars.
$$\begin{array} { c c l } & { \text { Action } } \\\text { Event } & A & B \\\hline 1 & 400 & 700 \\2 & 200 & 500\end{array}$$

-Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses, respectively, what is the EVPI for buying roses?

A) $1,500
B) $2,600
C) $700
D) $1,900

Question 14

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.5, what is the coefficient of variation for A1?

A) 1.5
B) 0.231
C) 2
D) 0.5

Question 15

TABLE 17-2
The following payoff matrix is given in dollars.
$$\begin{array} { c c l } & { \text { Action } } \\\text { Event } & A & B \\\hline 1 & 400 & 700 \\2 & 200 & 500\end{array}$$

-Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. What is the opportunity loss for buying 400 dozen roses and selling 200 dozen roses at the full price?

A) $1,000
B) - $2,000
C) $0
D) $500

Question 16

TABLE 17-2
The following payoff matrix is given in dollars.
$$\begin{array} { c c l } & { \text { Action } } \\\text { Event } & A & B \\\hline 1 & 400 & 700 \\2 & 200 & 500\end{array}$$

-Referring to Table 17-2, what is the best action using the maximax criterion?

A) Action A
B) Action B
C) either Action A or Action B
D) It cannot be determined.

Question 17

TABLE 17-2
The following payoff matrix is given in dollars.
$$\begin{array} { c c l } & { \text { Action } } \\\text { Event } & A & B \\\hline 1 & 400 & 700 \\2 & 200 & 500\end{array}$$

-Referring to Table 17-2, what is the EVPI?

A) 0
B) 600
C) 400
D) 300

Question 18

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.2 and S2 is 0.8, what is the expected opportunity loss (EOL) for A1?

A) 5.6
B) 4.8
C) 1.2
D) 0

Question 19

For a potential investment of $5,000, a portfolio has an EMV of $1,000 and a standard deviation of $100. What is the rate of return?

A) 20%
B) 50%
C) 5%
D) 10%

Question 20

TABLE 17-2
The following payoff matrix is given in dollars.
$\quad$ $\quad$ $\quad$ $\quad$$\text {Action}$
$\begin{array} { c c c } \text { Event } & A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$
Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the action with the preferable coefficient of variation?

A) Action A
B) Action B
C) either Action A or Action B
D) It cannot be determined.

Question 21

At Eastern University, 60% of the students are from suburban areas, 30% are from rural areas, and 10% are from urban areas. Of the students from the suburban areas, 60% are nonbusiness majors. Of the students from the rural areas, 70% are nonbusiness majors. Of the students from the urban areas, 90% are nonbusiness majors. What is the probability that a randomly selected student is a business major?

A) 0.66
B) 0.54
C) 0.34
D) 0.44

Question 22

In a local cellular phone area, company A accounts for 60% of the cellular phone market, while company B accounts for the remaining 40% of the market. Of the cellular calls made with company A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B will have interference. If a cellular call is selected at random, what is the probability that it will not have interference?

A) 0.14
B) 0.014
C) 0.028
D) 0.986

Question 23

TABLE 17-3
The following information is from 2 investment opportunities.
$$\begin{array} { l c r } & A & B \\\text { Expected monetary value } & \$ 900 & \$ 600 \\\text { Standard deviation } & 100 & 50\end{array}$$

-Referring to Table 17-3, what is the coefficient of variation for investment A?

A) 5.0%
B) 8.3%
C) 11.1%
D) 90.0%

Question 24

______is a procedure for revising probabilities based upon additional information.

A) Beckman's theorem
B) Bayes' theorem
C) Utility theory
D) Bernoulli's theorem

Question 25

TABLE 17-2 The following payoff matrix is given in dollars.
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Action}$
$\begin{array} { c c c } \text { Event } & A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$
Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the coefficient of variation for Action A?

A) 12.8%
B) 133.33%
C) 333.3%
D) 33.3%

Question 26

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. What is the payoff for buying and selling 400 dozen roses at the full price?

A) $6,000
B) $4,000
C) $12,000
D) It cannot be determined.

Question 27

TABLE 17-4
A stock portfolio has the following returns under the market conditions listed below.
$$\begin{array} { c c c } \text { Market Condition } & \text { Probability } & \text { Return } \\\hline \text { Bull } & 0.4 & \$ 200 \\\text { Stable } & 0.3 & \$ 100 \\\text { Bear } & 0.3 & - \$ 100\end{array}$$

-Referring to Table 17-4, what is the coefficient of variation?

A) 90.3%
B) 100%
C) 88.8%
D) 156.1%

Question 28

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.5, what is the expected opportunity loss (EOL) for A1?

A) 8
B) 7
C) 3
D) 4.5

Question 29

TABLE 17-2
The following payoff matrix is given in dollars.
$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event }& A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$
Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the return to risk ratio for Action B?

A) 3.0
B) 9.0
C) 0.167
D) 6.0

Question 30

The minimum expected opportunity loss is also equal to

A) expected value under certainty minus the expected monetary value of the worst alternative.
B) expected value of perfect information.
C) expected profit under certainty.
D) coefficient of variation.

Question 31

The curve for the _____ will show a rapid increase in utility for initial amounts of money followed by a gradual leveling off for increasing dollar amounts.

A) risk averter
B) risk neutral
C) profit seeker
D) risk taker

Question 32

A tabular presentation that shows the outcome for each decision alternative under the various states of nature is called

A) a payoff table.
B) a payback period matrix.
C) a decision tree.
D) a decision matrix.

Question 33

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, what is the opportunity loss for A2 when S1 occurs?

A) 5
B) 14
C) - 2
D) 0

Question 34

A medical doctor is involved in a $1 million malpractice suit. He can either settle out of court for $250,000 or go to court. If he goes to court and loses, he must pay $825,000 plus $175,000 in court costs. If he wins in court the plaintiffs pay the court costs. Identify the outcomes of this
Decision-making problem.

A) four consequences resulting from Go/Settle and Win/Lose combinations
B) two possibilities: (1) win the case in court and (2) lose the case in court
C) the amount of money paid by the doctor
D) two choices: (1) go to court and (2) settle out of court

Question 35

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1,what is the opportunity loss for A3 when S2 occurs?

A) 5
B) 0
C) 4
D) 6

Question 36

A company that manufactures designer jeans is contemplating whether to increase its advertising budget by $1 million for next year. If the expanded advertising campaign is successful, the company expects sales to increase by $1.6 million next year. If the advertising campaign fails, the company expects sales to increase by only $400,000 next year. If the advertising budget is not increased, the company expects sales to increase by $200,000. Identify the states of nature in this decision-making problem.

A) the increase in sales dollars next year
B) four consequences resulting from the Increase/Do Not Increase and Successful/Not Successful combinations
C) two possibilities: (1) campaign is successful and (2) campaign is not successful
D) two choices: (1) increase the budget and (2) do not increase the budget

Question 37

TABLE 17-4
A stock portfolio has the following returns under the market conditions listed below.
$$\begin{array} { c c c } \text { Market Condition } & \text { Probability } & \text { Return } \\\hline \text { Bull } & 0.4 & \$ 200 \\\text { Stable } & 0.3 & \$ 100 \\\text { Bear } & 0.3 & - \$ 100\end{array}$$

-Referring to Table 17-4, what is the standard deviation?

A) 4,840
B) 4,890
C) 124.9
D) 69.6

Question 38

The difference between expected payoff under certainty and expected value of the best act without certainty is the

A) expected value of perfect information.
B) expected rate of return.
C) expected monetary value.
D) expected net present value.

Question 39

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$

-Referring to Table 17-1, if the probability of S1 is 0.5, what is the return to risk ratio for A3?

A) 2
B) 1.5
C) 4.333
D) 0.667

Question 40

A medical doctor is involved in a $1 million malpractice suit. He can either settle out of court for $250,000 or go to court. If he goes to court and loses, he must pay $825,000 plus $175,000 in court costs. If he wins in court the plaintiffs pay the court costs. Identify the states of nature of this decision-making problem.

A) the amount of money paid by the doctor
B) two choices: (1) go to court and (2) settle out of court
C) four consequences resulting from Go/Settle and Win/Lose combinations
D) two possibilities: (1) win the case in court and (2) lose the case in court

Question 41

TABLE 17-2
The following payoff matrix is given in dollars.

$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event }& A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$

Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the optimal action using the EMV criterion?

A) Action A
B) Action B
C) either Action A or Action B
D) It cannot be determined.

Question 42

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$


-Referring to Table 17-1, what is the best action using the maximin criterion?

A) Action A1
B) Action A2
C) Action A3
D) It cannot be determined.

Question 43

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses, respectively, what is the optimal EMV for buying roses?

A) $1,900
B) $1,700
C) $900
D) $700

Question 44

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$


-Referring to Table 17-1, if the probability of S1 is 0.5, what is the expected opportunity loss (EOL) for A3?

A) 4.5
B) 7
C) 8
D) 3

Question 45

The risk seeker's curve represents the utility of one who enjoys taking risks. Therefore, the slope of the utility curve becomes______ for large dollar amounts.

A) uncertain
B) smaller
C) stable
D) larger

Question 46

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$


-Referring to Table 17-1, if the probability of S1 is 0.5, what is the expected profit under certainty (EPUC )?

A) 11
B) 5
C) 8
D) 3

Question 47

TABLE 17-2
The following payoff matrix is given in dollars.

$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event }& A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$

Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the best action using the maximin criterion?

A) Action A
B) Action B
C) either Action A or Action B
D) It cannot be determined.

Question 48

Which of the following is not a decision making criterion?

A) Maximizing the return-to-risk ratio.
B) Maximizing the expected monetary value of an action.
C) Minimizing expected profit under certainty.
D) Minimizing the expected opportunity loss of an action.

Question 49

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$


-Referring to Table 17-1, if the probability of S1 is 0.5, what is the expected monetary value (EMV ) for A2?

A) 4
B) 6.5
C) 8
D) 3

Question 50

TABLE 17-2
The following payoff matrix is given in dollars.

$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event }& A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$

Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the action with the preferable return to risk ratio?

A) Action A
B) Action B
C) either Action A or Action B
D) It cannot be determined.

Question 51

For a potential investment of $5,000, a portfolio has an EMV of $1,000 and a standard deviation of $100. What is the return to risk ratio?

A) 10
B) 20
C) 5
D) 50

Question 52

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses, respectively, then the optimal alternative using EMV for selling roses is to buy _____ dozen roses.

A) 400
B) 200
C) 100
D) 600

Question 53

The ______curve represents the expected monetary value approach.

A) Bernoulli
B) risk taker's
C) risk averter's
D) risk neutral

Question 54

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$


-Referring to Table 17-1, if the probability of S1 is 0.4, what is the probability of S2?

A) 0.6
B) 0.4
C) 0.5
D) 1.0

Question 55

TABLE 17-2
The following payoff matrix is given in dollars.

$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event }& A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$
Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the EMV for Action A?

A) $600
B) $700
C) $300
D) $550

Question 56

Look at the utility function graphed below and select the type of decision maker that corresponds to the graph.

A) risk player
B) risk neutral
C) risk taker
D) risk averter

Question 57

TABLE 17-2
The following payoff matrix is given in dollars.
$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event }& A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$

Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the EOL for Action A?

A) 200
B) 300
C) 0
D) 100

Question 58

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. If the probability of selling 100 dozen roses is 0.2 and 200 dozen roses is 0.5, what is the probability of selling 400 dozen roses?

A) 0.5
B) 0.2
C) 0.7
D) 0.3

Question 59

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$


-Referring to Table 17-1, what is the best action using the maximax criterion?

A) Action A1
B) Action A3
C) Action A2
D) It cannot be determined.

Question 60

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. What is the number of alternatives for the payoff table?

A) 2
B) 3
C) 4
D) It cannot be determined.

Question 61

At Eastern University, 60% of the students are from suburban areas, 30% are from rural areas, and 10% are from urban areas. Of the students from the suburban areas, 60% are nonbusiness majors. Of the students from the rural areas, 70% are nonbusiness majors. Of the students from the urban areas, 90% are nonbusiness majors. If a randomly selected student is not a business major, what is the probability that the student is from the urban area?

A) 0.214
B) 0.666
C) 0.706
D) 0.136

Question 62

TABLE 17-3
The following information is from 2 investment opportunities.
$$\begin{array} { l c r } & A & B \\\text { Expected monetary value } & \$ 900 & \$ 600 \\\text { Standard deviation } & 100 & 50\end{array}$$

-Referring to Table 17-3, which investment has the optimal return to risk ratio?

A) Investment A
B) Investment B
C) The investments are equal.
D) It cannot be determined.

Question 63

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses, respectively, what is the EOL for buying 200 dozen roses?

A) $1,500
B) $900
C) $1,600
D) $700

Question 64

A student wanted to find out the optimal strategy to study for a Business Statistics exam. He constructed the following payoff table based on the average amount of time he needed to put in every week studying for the course and the degree of difficulty of the exam. From the information that he gathered from students who had taken the course, he concluded that there was a 40% probability that the exam would be easy.

Referring to Table 17-6, how many possible courses of action are there?

Question 65

TABLE 17-2
The following payoff matrix is given in dollars.

$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event }& A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$

Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the optimal action using the EOL criterion?

A) Action A
B) Action B
C) either Action A or Action B
D) It cannot be determined.

Question 66

Look at the utility function graphed below and select the type of decision maker that corresponds to the graph.

A) risk averter
B) risk neutral
C) risk player
D) risk taker

Question 67

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses, respectively, what is the optimal EOL for buying roses?

A) $1,500
B) $700
C) $900
D) $1,600

Question 68

A medical doctor is involved in a $1 million malpractice suit. He can either settle out of court for $250,000 or go to court. If he goes to court and loses, he must pay $825,000 plus $175,000 in court costs. If he wins in court the plaintiffs pay the court costs. Identify the actions of this
Decision-making problem.

A) four consequences resulting from Go/Settle and Win/Lose combinations
B) two choices: (1) go to court and (2) settle out of court
C) two possibilities: (1) win the case in court and (2) lose the case in court
D) the amount of money paid by the doctor

Question 69

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$



-Referring to Table 17-1, if the probability of S1 is 0.2 and S2 is 0.8, what is the expected monetary value of A1?

A) 8
B) 2.4
C) 5.6
D) 16

Question 70

In a local cellular phone area, company A accounts for 60% of the cellular phone market, while company B accounts for the remaining 40% of the market. Of the cellular calls made with company A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B will have interference. If a cellular call is selected at random and has interference, what is the probability that it was with company A?

A) 0.571
B) 0.071
C) 0.429
D) It cannot be determined.

Question 71

TABLE 17-3
The following information is from 2 investment opportunities.
$$\begin{array} { l c r } & A & B \\\text { Expected monetary value } & \$ 900 & \$ 600 \\\text { Standard deviation } & 100 & 50\end{array}$$

-Referring to Table 17-3, what is the return to risk ratio for Investment B?

A) 24
B) 8
C) 12
D) 10

Question 72

TABLE 17-4
A stock portfolio has the following returns under the market conditions listed below.
$$\begin{array} { c c c } \text { Market Condition } & \text { Probability } & \text { Return } \\\hline \text { Bull } & 0.4 & \$ 200 \\\text { Stable } & 0.3 & \$ 100 \\\text { Bear } & 0.3 & - \$ 100\end{array}$$

-Referring to Table 17-4, what is the return to risk ratio?

A) 0.64
B) 1.18
C) 1.08
D) 2.00

Question 73

TABLE 17-2
The following payoff matrix is given in dollars.
$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event }& A & B \\\hline1 & 400 & 700 \\2 & 200 & 500\end{array}$
Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5.

-Referring to Table 17-2, what is the expected profit under certainty (EPUC )?

A) 0
B) 300
C) 600
D) 500

Question 74

TABLE 17-4
A stock portfolio has the following returns under the market conditions listed below.
$$\begin{array} { c c c } \text { Market Condition } & \text { Probability } & \text { Return } \\\hline \text { Bull } & 0.4 & \$ 200 \\\text { Stable } & 0.3 & \$ 100 \\\text { Bear } & 0.3 & - \$ 100\end{array}$$

-Referring to Table 17-4, what is the EMV?

A) $80
B) $90
C) $130
D) $180

Question 75

TABLE 17-5
The following payoff table shows profits associated with a set of 2 alternatives under 3 possible events.
$\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$
$\begin{array} { c c c } \text { Event } & A & B \\1 & 1000 & 1200 \\2 &500 & 700\\3&300&-200\end{array}$

Suppose that the probability of Event 1 is 0.2, Event 2 is 0.5, and Event 3 is 0.3.

-Referring to Table 17-5, what is the return to risk ratio for Action B?

Question 76

A company that manufactures designer jeans is contemplating whether to increase its advertising budget by $1 million for next year. If the expanded advertising campaign is successful, the company expects sales to increase by $1.6 million next year. If the advertising campaign fails, the company expects sales to increase by only $400,000 next year. If the advertising budget is not increased, the company expects sales to increase by $200,000. Identify the actions in this decision-making problem.

A) two possibilities: (1) campaign is successful and (2) campaign is not successful
B) two choices: (1) increase the budget and (2) do not increase the budget
C) the increase in sales dollars next year
D) four consequences resulting from the Increase/Do Not Increase and Successful/Not Successful combinations

Question 77

TABLE 17-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature.
$\begin{array}{llcc} \text {States } &\text { A1 }&\text { A2 }&\text {A3 }\\\hline1&12&-2&8\\2&4&10&5\end{array}$


$\text {where:}$$\quad$$\quad$ $\text {S1 is state of nature 1 }$$\quad$$\text {A1 is action alternative 1}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\text {S2 is state of nature 2}$$\quad$$\text { A2is action alternative 2}$
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {A3 is action alternative3 }$



-Referring to Table 17-1, if the probability of S1 is 0.5, what is the expected monetary value (EMV ) for A1?

A) 6.5
B) 4
C) 3
D) 8

Question 78

TABLE 17-3
The following information is from 2 investment opportunities.
$$\begin{array} { l c r } & A & B \\\text { Expected monetary value } & \$ 900 & \$ 600 \\\text { Standard deviation } & 100 & 50\end{array}$$

-Referring to Table 17-3, which investment has the optimal coefficient of variation?

A) Investment A
B) Investment B
C) The investments are equal.
D) It cannot be determined.

Question 79

For a potential investment of $5,000, a portfolio has an EMV of $1,000 and a standard deviation of $100. What is the coefficient of variation?

A) 10%
B) 20%
C) 100%
D) 50%

Question 80

In a local cellular phone area, company A accounts for 60% of the cellular phone market, while company B accounts for the remaining 40% of the market. Of the cellular calls made with company A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B will have interference. If a cellular call is selected at random, what is the probability that it will have interference?

A) 0.014
B) 0.986
C) 0.14
D) 0.028