Deck 20: An Introduction to Decision Theory

Question 1

An expected opportunity loss can only be greater than or equal to zero.

Answer 1

True

Question 2

A way to decide which common stock to purchase is to determine the profit that might be lost because the exact state of nature (the market behavior)was not known at the time the investor bought the stock. This potential loss is called opportunity loss or regret.

Answer 2

True

Question 3

An expected monetary value can only be greater than or equal to zero.

Answer 3

False

Question 4

Statistical decision theory is defined as the collection of techniques a decision maker can apply to choose the best alternative action.

Question 5

Of the three components in any decision-making situation,which of the following cannot be controlled?

A)Alternatives
B)Payoff
C)States of nature
D)Seasonal indexes

Question 6

Which of the following is not a component of the decision-making process?

A)Alternatives
B)Payoff
C)States of nature
D)Seasonal indexes

Question 7

Optimists advocate a maximin strategy.

Question 8

Optimists advocate a maximax strategy.

Question 9

A state of nature is an uncertain,future event.

Question 10

Maximizers advocate a maximin strategy.

Question 11

A decision maker usually has a choice among several possible alternative acts. For each alternative act,there are many possible results called states of occurrence.

Question 12

Besides a payoff table,the information for decision analysis can be organized using a ________.

A)decision tree
B)scatter diagram
C)fishbone diagram
D)Pareto chart

Question 13

If the expected value of stock purchases under conditions of certainty is $1,900 and the expected value of stock purchases under conditions of uncertainty is $1,840,then the $60 difference is called the value of perfect information.

Question 14

When the payoffs are profits,the maximin strategy selects the alternative or act with the maximum gain.

Question 15

In decision making,if there are one or more unknown factors,then the decision is made under conditions of uncertainty.

Question 16

Applying probabilities to a payoff table results in ________.

A)expected opportunity loss for each alternative or act
B)expected monetary value for each alternative or act
C)value of perfect information
D)a decision tree

Question 17

Sensitivity analysis examines the effects that changes in the probabilities for the states of nature have on the expected values of the alternatives or acts,and the corresponding decisions.

Question 18

A decision maker's course of action results in a consequence or payoff.

Question 19

By definition,the decision maker has no control over the states of nature.

Question 20

What is the most optimistic of all possible maximin,maximax,and minimax regret strategies?

A)Minimax
B)Maximax
C)Maximin
D)Minimax regret

Question 21

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the opportunity loss for purchasing six watermelons when the demand is for eight watermelons?

A)0
B)3
C)4
D)6

Question 22

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the opportunity loss for purchasing eight watermelons when the demand is for eight watermelons?

A)0
B)3
C)4
D)6

Question 23

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of nine watermelons when the demand is for nine watermelons?

A)6
B)13
C)20
D)27

Question 24

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of seven watermelons when the demand is for six watermelons?

A)14
B)18
C)21
D)24

Question 25

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of eight watermelons when the demand is for six watermelons?

A)17
B)21
C)24
D)10

Question 26

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the opportunity loss for purchasing seven watermelons when the demand is for six watermelons?

A)0
B)3
C)4
D)6

Question 27

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of nine watermelons when the demand is for six watermelons?

A)6
B)13
C)20
D)27

Question 28

A maximax strategy will always choose the act or alternative that ________.

A)maximizes the expected monetary value
B)minimizes the maximum regret or opportunity loss
C)maximizes the potential payoff regardless of uncertainty
D)guarantees a payoff for any state of nature

Question 29

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of nine watermelons when the demand is for seven watermelons?

A)6
B)13
C)20
D)27

Question 30

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the opportunity loss for purchasing six watermelons when the demand is for six watermelons?

A)0
B)3
C)4
D)6

Question 31

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of seven watermelons when the demand is for seven or more watermelons?

A)18
B)21
C)24
D)42

Question 32

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the opportunity loss for purchasing seven watermelons when the demand is for nine watermelons?

A)0
B)3
C)4
D)6

Question 33

A minimax regret strategy will always choose the act or alternative that ________.

A)maximizes the expected monetary value
B)minimizes the maximum regret or opportunity loss
C)maximizes the potential payoff regardless of uncertainty
D)guarantees a payoff for any state of nature

Question 34

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of nine watermelons when the demand is for eight watermelons?

A)6
B)13
C)20
D)27

Question 35

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of six watermelons when the demand is for seven or more watermelons?

A)18
B)21
C)28
D)49

Question 36

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of eight watermelons when the demand is for eight or more watermelons?

A)17
B)21
C)24
D)10

Question 37

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of eight watermelons when the demand is for seven watermelons?

A)10
B)17
C)24
D)21

Question 38

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the payoff value for the purchase of six watermelons when the demand is for six watermelons?

A)18
B)21
C)24
D)42

Question 39

The expected value under conditions of uncertainty subtracted from the expected value under conditions of certainty will result in ________.

A)the value of perfect information
B)an expected opportunity loss
C)an expected monetary value
D)an expected decision strategy

Question 40

A maximin strategy will always choose the act or alternative that ________.

A)maximizes the expected monetary value
B)minimizes the maximum regret or opportunity loss
C)maximizes the potential payoff regardless of the state of nature
D)guarantees a payoff for any state of nature

Question 41

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. Based on a maximin decision strategy,what alternative is selected?

A)Order 6
B)Order 7
C)Order 8
D)Order 9

Question 42

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. How many dozen ICT T-shirts should be purchased to yield the highest potential payoff?

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

Question 43

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing two dozen T-shirts?

A)72
B)120
C)168
D)192

Question 44

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. If the merchant purchases eight watermelons,the minimum opportunity loss occurs when the demand is how many units?

A)6
B)7
C)8
D)9

Question 45

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing one dozen T-shirts?

A)0
B)72
C)120
D)168

Question 46

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the following opportunity loss table showing the potential lost profit for each purchase decision or act from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing three dozen T-shirts?

A)84
B)108
C)156
D)204

Question 47

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the value of perfect information if the expected payoff is $180?

A)0
B)96
C)120
D)150

Question 48

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the following opportunity loss table showing the potential lost profit for each purchase decision or act from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. How many dozen T-shirts should you purchase based on minimizing the expected opportunity loss?

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

Question 49

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What would be the best decision if the maximin strategy is used?

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

Question 50

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the following opportunity loss table showing the potential lost profit for each purchase decision or act from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing one dozen T-shirts?

A)84
B)108
C)156
D)204

Question 51

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. Based on a maximax strategy,what alternative is selected?

A)Order 6
B)Order 7
C)Order 8
D)Order 9

Question 52

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the following opportunity loss table showing the potential lost profit for each purchase decision or act from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing two dozen T-shirts?

A)84
B)108
C)156
D)204

Question 53

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing four dozen T-shirts?

A)72
B)120
C)168
D)192

Question 54

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the opportunity loss for purchasing eight watermelons when the demand is for nine watermelons?

A)0
B)3
C)4
D)6

Question 55

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. If the merchant purchases seven watermelons,the maximum opportunity loss occurs when the demand is how many units?

A)6
B)7
C)8
D)9

Question 56

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Because this seedless watermelon costs $4,will sell for $7,and is highly perishable,he expects only to sell between six and nine of them. What is the opportunity loss for purchasing nine watermelons when the demand is for seven watermelons?

A)0
B)4
C)8
D)12

Question 57

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing three dozen T-shirts?

A)72
B)120
C)168
D)192

Question 58

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the maximum payoff under conditions of certainty?

A)120
B)240
C)360
D)480

Question 59

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the following opportunity loss table showing the potential lost profit for each purchase decision or act from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing four dozen T-shirts?

A)84
B)108
C)156
D)204

Question 60

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. How many dozen ICT T-shirts should be purchased to yield the highest expected monetary value?

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

Question 61

A person is trying to decide if he or she should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner,the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature),the person finds that the probability of winning is 0.001. Based on this information,the following payoff table can be constructed: What is the expected monetary value of buying the ticket?

A)+$1.00
B)−$0.998
C)+$0.998
D)−$1.998

Question 62

A person is trying to decide if he or she should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner,the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature),the person finds that the probability of winning is 0.001. Based on this information,the following payoff table can be constructed: Based on the expected monetary value of buying a ticket,what is the best decision?

A)Buy
B)Don't buy
C)Lose
D)Win

Question 63

A person is trying to decide if he or she should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner,the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature),the person finds that the probability of winning is 0.001. Based on this information,the following payoff table can be constructed: What is the value of perfect information?

A)$1.00
B)$0.998
C)$1.998
D)Cannot be computed

Question 64

A person is trying to decide if he or she should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner,the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature),the person finds that the probability of winning is 0.001. Based on this information,the following payoff table can be constructed: What is the probability of losing $2.00?

A)0.001
B)0.999
C)1.00
D)Cannot be computed

Question 65

The national sales manager for "I colored this" (ICT)T-shirts provides all salespersons with the payoff table shown next,giving the estimated profit when a retailer purchases from one to four dozen T-shirts. The probability of demand for each state of nature is also shown. What would be the best decision if the maximax strategy is used?

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

Question 66

A person is trying to decide if he or she should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner,the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature),the person finds that the probability of winning is 0.001. Based on this information,the following payoff table can be constructed: What is the decision that uses a maximax or optimistic approach?

A)Buy
B)Don't buy
C)Lose
D)Win

Question 67

A person is trying to decide if he or she should buy a lottery ticket. The ticket costs $2.00. If the ticket is a winner,the prize would be $1,000. Knowing that winning $1,000 is not a certain outcome (state of nature),the person finds that the probability of winning is 0.001. Based on this information,the following payoff table can be constructed: What is the decision that uses a maximin approach?

A)Buy
B)Don't buy
C)Lose
D)Win