Deck 20: An Introduction to Decision Theory

Question 1

In decision theory, a payoff is expressed as a profit or a ______.

Answer 1

loss

Question 2

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

Answer 2

False

Question 3

In a payoff table, another name for alternatives is _______.

Answer 3

acts

Question 4

The _____________________ is the difference between the expected monetary value under conditions of certainty and the expected monetary value under uncertainty.

Question 5

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

Question 6

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

Question 7

Another term for a payoff or consequence is _________________.

Question 8

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

Question 9

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

Question 10

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

Question 11

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 12

Optimists advocate a maximin strategy.

Question 13

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

Question 14

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.

Question 15

Optimists advocate a maximax strategy.

Question 16

Maximizers advocate a maximin strategy.

Question 17

A state of nature is an uncertain, future event.

Question 18

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

Question 19

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 20

To compute an expected monetary value, it requires that ______________ are estimated for each state of nature.

Question 21

A ________ decision-making strategy maximizes the maximum gain.

Question 22

When all the facts are known in a decision-making situation, it can be said that the decision was made under conditions of _____________.

Question 23

The maximax strategy is an ________ strategy for decision making.

Question 24

The potential loss for an uncertain state of nature is called a ________________.

Question 25

__________________ examines the effect that changes in the probabilities for states of nature have on selecting an alternative or act.

Question 26

A table to organize decision-making data, including various acts and possible profits or losses, is called a _______________________.

Question 27

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 28

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 29

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 30

The potential loss associated with a future state of nature is called ________________.

Question 31

The maximin strategy is a __________ strategy for decision making.

Question 32

A decision maker selects a course of action called an ________________.

Question 33

The average return for a particular act or decision alternative is called the _____________________.

Question 34

In decision theory, _______ create uncertainty in selecting an alternative.

Question 35

A graph of all the possible courses of action and their consequent possible outcomes is called a ________________.

Question 36

In statistical decision making, the act or decision alternative yielding the maximum expected payoff also yields the minimum ________________.

Question 37

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

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

Question 38

The ___________ decision-making strategy maximizes the minimum gain.

Question 39

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 40

In decision theory, an uncertain future outcome is called a ____________________.

Question 41

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 42

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 43

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 44

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 45

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 46

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 47

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 48

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 49

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 50

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 51

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 52

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 53

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 54

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 55

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 56

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 57

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 58

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 59

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 60

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 61

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 62

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 63

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 "I colored this" T-shirts should be purchased to yield the highest payoff?

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

Question 64

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 65

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

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

Question 66

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 67

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 68

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 69

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 70

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 71

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 72

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 73

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 74

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 75

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 76

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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 77

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 78

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 "I colored this" T-shirts should be purchased to yield the highest expected monetary value?

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

Question 79

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 80

The manager of Paul's fruit and vegetable store is considering the purchase of a new seedless watermelon from a wholesale distributor. Since this seedless watermelon costs $4, will sell for $7, and is highly perishable, he only expects 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