Deck 24: Decision Making and Risk

Question 1

A farm owner has three possible hiring decisions.His profits depend on the growing season as shown below.If the probability of a good growing season is 0.75.What is the expected value of hiring teenagers?

A)$62,500
B)$52,500
C)$46,250
D)$12,990
E)None of the above.

Answer 1

$52,500

Question 2

A company is considering three alternatives (action) to deal with this extra work load as shown below (in $100,000).If the likelihoods of easy, moderately difficult and extremely difficult are 0.2, 0.4 and 0.4, respectively, the best decision according to the expected value approach is to ________________________ .

A)outsource
B)hire temporary staff
C)use full time staff in overtime
D)outsource if the file modifications are extremely difficult
E)use full time staff in overtime if the file modifications are easy

Answer 2

hire temporary staff

Question 3

A company believes there is a 20% chance the file modifications will be easy, a 40% chance that they will be moderately difficult and a 40% that they will be extremely difficult.Based on old files, modifications will be extensive or minor.Suppose the probabilities are as follows: P (Minor | Easy) = 0.80, P (Minor | Moderately Difficult)
= 0)50 and P (Minor | Extremely Difficult) = 0.20.What is the probability that the difficulty of the file modifications and transfer will be extremely difficult given that the modifications required are minor?

A)0.57
B)0.20
C)0.32
D)0.44
E)0.90

Answer 3

0.44

Question 4

A company is considering three alternatives (action) to deal with this extra work load as shown below (in $100,000).Using the minimin approach, the company should ________________________ .

A)outsource
B)hire temporary staff
C)use full time staff in overtime
D)outsource if the file modifications are extremely difficult
E)use full time staff in overtime if the file modifications are easy

Question 5

A company is considering three alternatives to deal with extra work load as shown below (in $100,000).If the likelihoods of easy, moderately difficult and extremely difficult are 0.2, 0.4 and 0.4, respectively, the expected cost of hiring temporary staff is ________________________ .

A)3.04
B)2.94
C)1.99
D)3.45
E)None of the above.

Question 6

A company believes there is a 20% chance the file modifications will be easy, a 40% chance that they will be moderately difficult and a 40% that they will be extremely difficult.Based on old files, modifications will be extensive or minor.Suppose the probabilities are as follows: P (Minor | Easy) = 0.80, P (Minor | Moderately Difficult)
= 0)50 and P (Minor | Extremely Difficult) = 0.20.What is the probability that the difficulty of the file modifications and transfer will be extremely difficult given that the consultant believes the modifications required are extensive?

A)0.57
B)0.20
C)0.32
D)0.44
E)0.90

Question 7

Using the payoff table ($ million) is shown below for two possible actions, if the probabilities for future mortgage interest rates going up, staying about the same, and going down are 0.35, 0.50 and 0.15, respectively, the best decision according to the expected value approach is to build ________________________ .

A)the active retirement community if interest rates go down
B)the active retirement community
C)townhouses/condominiums if interest rates go down
D)townhouses/condominiums
E)either the active retirement community or townhouses/condominiums

Question 8

A company believes there is a 20% chance the file modifications will be easy, a 40% chance that they will be moderately difficult and a 40% that they will be extremely difficult.Based on old files, modifications will be extensive or minor.Suppose the probabilities are as follows: P (Minor | Easy) = 0.80, P (Minor | Moderately Difficult)
= 0)50 and P (Minor | Extremely Difficult) = 0.20.What is the probability that the difficulty of the file modifications and transfer will be extremely difficult given that the modifications required are minor?

A)0.56
B)0.20
C)0.08
D)0.44
E)0.18

Question 9

A land owner is considering two actions and mortgage interest rates will affect his outcomes.The payoff table ($ million) is shown below.According to the maximin approach, the land owner should build ________________________ .

A)the active retirement community if interest rates go down
B)the active retirement community
C)townhouses/condominiums if interest rates go down
D)townhouses/condominiums
E)either the active retirement community or townhouses/condominiums

Question 10

A company is considering three alternatives to deal with extra work load (in $100,000) as shown below.If the likelihoods of easy, moderately difficult and extremely difficult are 0.2, 0.4 and 0.4, respectively, what is the expected value (in $100,000) with perfect information?

A)2.68
B)2.94
C)0.26
D)0.16
E)None of the above.

Question 11

A farm owner has three possible hiring decisions.His profits depend on the growing season as shown below.If the probability of a good growing season is 0.75.Based on the expected value approach, the farmer should ________________________ .

A)hire migrant workers if the growing season is good
B)hire teenagers
C)do not do any extra hiring
D)hire migrant workers
E)do not do any extra hiring if the growing season is bad

Question 12

A farm owner has three possible hiring decisions.His profits depend on the growing season as shown below.If the probability of a good growing season is 0.75.The return to risk ratio for hiring migrant workers is ________________________ .

A)8.40
B)4.05
C)2.89
D)0.346
E)None of the above.

Question 13

24.7 Estimating Variation.A farm owner has three possible hiring decisions.His profits depend on the growing season as shown below.If the probability of a good growing season is 0.75.The standard deviation in payoffs for hiring migrant workers is ________________________ .

A)$21,651
B)$12,990
C)$5495
D)$2500
E)None of the above.

Question 14

A farm owner could hire either migrant workers or local teenagers who need summer employment.His profits depend on the growing season as shown below.Using the maximax approach, the farmer would ________________________ .

A)hire migrant workers if the growing season is good
B)hire teenagers
C)not do any extra hiring
D)hire migrant workers
E)not do any extra hiring if the growing season is good

Question 15

24.4 The Expected Value of an Action.Using the payoff table ($ million) is shown below, if the probabilities for future mortgage interest rates going up, staying about the same, and going down are .35, .50 and .15, respectively, what is the expected value for building an active retirement community?

A)$2.5 million
B)$3.625 million
C)$2.75 million
D)$875,000
E)None of the above

Question 16

A farm owner has three possible hiring decisions.His profits depend on the growing season as shown below.If the probability of a good growing season is 0.75.If the farmer is risk averse, he would ________________________ .

A)hire migrant workers
B)hire teenagers
C)do not do any extra hiring
D)make the same decision as he would using the expected value approach
E)give up farming

Question 17

A company is considering three alternatives (action) to deal with this extra work load as shown below (in $100,000).Using the minimin approach, the company should ________________________ .

A)outsource
B)hire temporary staff
C)use full time staff in overtime
D)use full time staff in overtime if the file modifications are easy
E)hire temporary staff if the file modifications are moderately difficult

Question 18

Using the payoff table ($ million) is shown below, if the probabilities for future mortgage interest rates going up, staying about the same, and going down are 0.35, 0.50 and 0.15, respectively, the expected value with perfect information is ________________________ .

A)$2.5 million
B)$3.625 million
C)$2.75 million
D)$875,000
E)None of the above.

Question 19

A company is considering three alternatives to deal with extra work load as shown below (in $100,000).If the likelihoods of easy, moderately difficult and extremely difficult are 0.2, 0.4 and 0.4, respectively, the standard deviation in costs associated with outsourcing is ________________________ .

A)0.37
B)0.95
C)1.11
D)1.23
E)None of the above.