Deck 19: Decision Analysis

Question 1

Revise probabilities in light of sample information by using Bayesian analysis and calculating the expected value of sample information.

Answer 1

By using Bayes' theorem,the probabilities associated with the states of nature in decision making under risk can be revised when new information is obtained.This information can be helpful to the decision maker.However,it usually carries a cost.This cost can reduce the payoff of decision making with sample information.The EMV with sample information can be compared with the EMV without it to determine the value of sample information.

Question 2

In decision-making under risk,the expected monetary payoff of perfect information is the weighted average of the best payoff for each state of nature (using the probability of the state of nature as the weight).

Answer 2

True

Question 3

Make decisions under risk by constructing decision trees,calculating expected monetary value and expected value of perfect information,and analyzing utility.

Answer 3

In decision making with risk,the decision maker has some prior knowledge of the probability of each occurrence of each state of nature.With these probabilities,a weighted payoff referred to as expected monetary value (EMV)can be calculated for each decision alternative.A person who makes decisions based on these EMVs is called an EMVer.The EMV is essentially the average payoff that would occur if the decision process were to be played out over a long period of time with the probabilities holding constant.
The expected value of perfect information can be determined by comparing the EMV if the states of nature are known to the EMV with no such information.The difference in the two is the expected value of perfect information.Utility refers to a decision maker's propensity to take risks.People who avoid risks are called risk avoiders.People who are prone to take risks are referred to as risk takers.People who use EMV generally fall between these two categories.Utility curves can be sketched to ascertain or depict a decision maker's tendency toward risk.

Question 4

In a decision-making under uncertainty scenario,the decision maker attempts to develop a strategy based on payoffs since virtually no information is available about which state of nature will occur.

Question 5

In a decision-making under uncertainty scenario,the decision maker chooses the decision alternative that has the minimum expected (i.e. ,probability-weighted)payoff among all the available alternatives.

Question 6

In a decision-making scenario,if the decision maker knows which state of nature will occur,the scenario is called decision-making under certainty.

Question 7

In a decision-making scenario,if it is not known which of the states of nature will occur and further if the probabilities of occurrence of the states are also unknown,the scenario is called decision-making under double risk.

Question 8

The value of perfect information is the difference between the monetary payoff with perfect information and the expected monetary payoff with no information.

Question 9

In a decision analysis problem,variables (such as benefits or rewards that result from investments in common stocks or corporate bonds and from a new product launch)which result from selecting a particular decision alternative are called posterior probabilities.

Question 10

In a decision-making under uncertainty scenario using the strategy of minmax regret,all the entries in the opportunity loss table must be zero or positive.

Question 11

In a decision-making under uncertainty scenario,the best decision alternative based on the strategy of minmax regret will always have zero regret.

Question 12

In a decision-making under risk scenario,the expected monetary value of a decision alternative is the weighted average (using the probability of each state of nature as the weight)of the payoffs to the decision alternative in each state of the nature.

Question 13

Make decisions under uncertainty using the maximax criterion,the maximin criterion,the Hurwicz criterion,and minimax regret.

Question 14

The expected monetary payoff of perfect information is the value of perfect information.

Question 15

In a decision analysis problem,variables (such as general macroeconomic conditions)which are not under the decision maker's control are called prior probabilities.

Question 16

In a decision-making scenario,if it is not known which of the states of nature will occur but the probabilities of occurrence of the states are known.the scenario is called decision-making under risk.

Question 17

Make decisions under certainty by constructing a decision table.

Question 18

In decision-making under risk,the expected monetary value without information is the largest of the expected monetary values for the various decision alternatives.

Question 19

In a decision-making under risk scenario,the expected monetary value of a decision alternative is the arithmetic average of the payoffs to the decision alternative in each state of the nature.

Question 20

In a decision analysis problem,variables (such as investing in common stocks or corporate bonds)which are under the decision maker's control are called decision alternatives.

Question 21

Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land.If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.For Dan's decision problem,the variable "net loss of $50,000" is one of the ___.

A)payoffs
B)decision alternatives
C)states of nature
D)revised probabilities
E)prior probabilities

Question 22

In decision-making under uncertainty,the approach that considers only the best and the worst payoffs for each decision alternative is the ___.

A)maximin criterion
B)maximax criterion
C)Hurwicz criterion
D)minimax regret strategy
E)maximin regret strategy

Question 23

Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land.If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.For Dan's decision problem,the variable "oil in the tract" is one of the ___.

A)payoffs
B)decision alternatives
C)states of nature
D)revised probabilities
E)prior probabilities

Question 24

The concept of utility can be helpful to apply decision analysis techniques to situations which do not lend themselves to expected monetary value analysis.

Question 25

Consider the following decision table with rewards in $ millions. Using the Hurwicz criterion with alpha = 0.1,the appropriate choice would be ___.

A)d₁
B)d₂
C)d₃
D)d₄
E)d₅

Question 26

In decision-making under uncertainty,an optimistic approach is the ___.

A)maximin criterion
B)maximax criterion
C)Hurwicz criterion
D)minimax regret strategy
E)maximin regret strategy

Question 27

Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land.If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.For Dan's decision problem,the variable "drill the well" is one of the ___.

A)payoffs
B)decision alternatives
C)states of nature
D)revised probabilities
E)prior probabilities

Question 28

Dianna Ivy is evaluating a plan to expand the production facilities of International Compressors Company which manufactures natural gas compressors.Dianna feels that the price of coal is a significant factor in her decision,but she cannot control it.For her decision,the different prices of coal represent the ___.

A)payoffs
B)decision alternatives
C)states of nature
D)revised probabilities
E)prior probabilities

Question 29

Consider the following decision table with rewards in $ millions. Using the Hurwicz criterion with alpha = 0.2,the appropriate choice would be ___.

A)d₁
B)d₂
C)d₃
D)d₄
E)d₅

Question 30

Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land.If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.The probability of the state of nature "oil in the tract" is unknown.If Dan is an optimist,he would choose the ___.

A)maximin criterion
B)maximax criterion
C)Hurwicz criterion
D)minimax regret strategy
E)maximin regret strategy

Question 31

Consider the following decision table with rewards in $ millions. The opportunity loss for the combination "S₃" and "d₁" is ___.

A)9
B)5
C)3
D)0
E)-1

Question 32

Consider the following decision table with rewards in $ millions. Using the maximin criterion,the appropriate choice would be ___.

A)d₁
B)d₂
C)d₃
D)d₄
E)d₅

Question 33

In a decision analysis problem,variables (such as investing in common stocks or corporate bonds)which are under the decision maker's control are called ___.

A)payoffs
B)decision alternatives
C)states of nature
D)revised probabilities
E)prior probabilities

Question 34

Dan Hein owns the mineral and drilling rights to a 1,000 hectare tract of land.If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.The probability of the state of nature "oil in the tract" is unknown.If Dan is a pessimist,he would choose the ___.

A)maximin criterion
B)maximax criterion
C)Hurwicz criterion
D)minimax regret strategy
E)maximin regret strategy

Question 35

A risk-avoider decision maker will bail out of a risky scenario only if the compensation to bail out is more than the expected monetary payoff from the risky scenario.

Question 36

In decision-making under uncertainty,a pessimistic approach is the ___.

A)maximin criterion
B)maximax criterion
C)Hurwicz criterion
D)minimax regret strategy
E)maximin regret strategy

Question 37

Consider the following decision table with rewards in $ millions. The opportunity loss for the combination "S₂" and "d₁" is ___.

A)9
B)5
C)3
D)0
E)-1

Question 38

Consider the following decision table with rewards in $ millions. Using the maximax criterion,the appropriate choice would be ___.

A)d₁
B)d₂
C)d₃
D)d₄
E)d₅

Question 39

A risk-taker decision maker will bail out of a risky scenario only if the compensation to bail out is more than the expected monetary payoff from the risky scenario.

Question 40

The value of sample information is the ratio of the expected monetary value with information to the expected monetary value without information.

Question 41

Ray Crofford is evaluating investment alternative s to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions:
For the combination of 'Bear' and 'Mixture',the opportunity loss is ___.

A)0
B)5
C)13
D)33
E)-10

Question 42

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions: For the 'Stocks' and 'Bonds' choices,the indifference value of Hurwicz's alpha is ___.

A)0.82
B)0.71
C)0.65
D)0.33
E)0.50

Question 43

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions: If Ray uses the maximin criterion,the appropriate choice would be ___.

A)T-Bills
B)Stocks
C)Bonds
D)Mixture
E)none

Question 44

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities: The EMV of investing in Stocks is ___.

A)$30,000
B)$63,000
C)$78,000
D)$81,000
E)$100,000

Question 45

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste.She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities: The EMV of introducing the new package in the "Northeast only" market is ___.

A)$50,000
B)$70,000
C)$90,000
D)$260,000
E)$300,000

Question 46

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand: The opportunity loss for the combination "Purchase New Equipment" and "Low" is ___.

A)0.5
B)1.5
C)2.5
D)3.0
E)3.5

Question 47

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand: The opportunity loss for the combination "Purchase New Equipment" and "High" is ___.

A)0.0
B)0.5
C)2.5
D)3.0
E)3.5

Question 48

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions: For the combination of 'T-Bills' and 'Neutral',the opportunity loss is ___.

A)0
B)5
C)7
D)8
E)-10

Question 49

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste.She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities: The EMV of introducing the new package in the "National" market is ___.

A)$50,000
B)$70,000
C)$90,000
D)$260,000
E)$300,000

Question 50

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand: If Trey uses the maximax criterion,the appropriate alternative would be: ___.

A)lease new equipment
B)purchase new equipment
C)add third shift
D)do nothing
E)do everything

Question 51

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions: If Ray uses the maximax criterion,the appropriate choice would be ___.

A)T-Bills
B)Stocks
C)Bonds
D)Mixture
E)none

Question 52

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions: If Ray uses the Hurwicz criterion with alpha = 0.1,the appropriate choice is ___.

A)T-Bills
B)Stocks
C)Bonds
D)Mixture
E)none

Question 53

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions: If Ray uses the Hurwicz criterion with alpha = 0.5,the appropriate choice is ___.

A)T-Bills
B)Stocks
C)Bonds
D)Mixture
E)none

Question 54

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions: For the 'T-Bills' and 'Bonds' choices,the indifference value of Hurwicz's alpha is ___.

A)0.8267
B)0.7134
C)0.6555
D)0.3333
E)0.5000

Question 55

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste.She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities: If Melissa uses the EMV criterion,the appropriate choice would be: ___.

A)Northeast only
B)Southeast only
C)National
D)None (don't introduce the new package)

Question 56

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions: If Ray uses the Hurwicz criterion with alpha = 0.9,the appropriate choice is ___.

A)T-Bills
B)Stocks
C)Bonds
D)Mixture
E)none

Question 57

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand: If Trey uses the maximin criterion,the appropriate alternative would be: ___.

A)lease new equipment
B)purchase new equipment
C)add third shift
D)do nothing
E)do everything

Question 58

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities: If Ray uses the EMV criterion,the appropriate choice is ___.

A)T-Bills
B)Stocks
C)Bonds
D)Mixture
E)Bank CD's

Question 59

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand: If Trey uses the Hurwicz criterion with alpha = 0.4,the appropriate alternative would be: ___.

A)lease new equipment
B)purchase new equipment
C)add third shift
D)do nothing
E)do everything

Question 60

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand: If Trey uses the Hurwicz criterion with alpha = 0.1,the appropriate alternative would be: ___.

A)lease new equipment
B)purchase new equipment
C)add third shift
D)do nothing
E)do everything

Question 61

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities: The expected monetary payoff with perfect information is ___.

A)$128,000
B)$137,000
C)$144,000
D)$151,000
E)$127,000

Question 62

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste.She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities: The expected monetary payoff with perfect information is ___.

A)$570,000
B)$680,000
C)$760,000
D)$830,000
E)$980,000

Question 63

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities: The expected value of perfect information is ___.

A)$57,000
B)$63,000
C)$79,000
D)$82,000
E)$87,000

Question 64

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets: If the advisor predicts a Bull market the EMV of the Stocks alternative,using revised probabilities,is ___.

A)$168,900
B)$207,650
C)$157,300
D)$306,000
E)$134,650

Question 65

Frank Forgione has the right to enter a contest where he has a 50% chance of winning $50,000 and a 50% chance of losing $0.It costs Frank nothing to enter the contest.If he is willing to give up his right to enter the contest for a sure payment of $25,000,he is ___.

A)a risk avoider
B)an optimist
C)a risk taker
D)risk neutral (an EMV'er)
E)a gambler

Question 66

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities: The EMV of investing in Bonds is ___.

A)$30,000
B)$63,000
C)$78,000
D)$81,000
E)$100,000

Question 67

In decision-making under risk,the expected monetary value without information is ___.

A)the weighted average of the best payoff for each state of nature
B)the largest of the EMVs for the different decision alternatives
C)never smaller than the expected monetary payoff with perfect information
D)the average of the EMVs
E)half the expected monetary value with information

Question 68

The expected monetary value without information is $2,500,and the expected monetary payoff with perfect information is $5,000.The expected value of perfect information is ___.

A)$7,500
B)$2,500
C)$1,500
D)$2,000
E)$1,250

Question 69

The expected monetary value without information is $60,and the expected monetary payoff with perfect information is $120.The expected value of perfect information is __.

A)$60
B)$2
C)$180
D)$0.50
E)$120

Question 70

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities: The EMV of investing in Mixture is ___.

A)$30,000
B)$63,000
C)$78,000
D)$81,000
E)$100,000

Question 71

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets: If the advisor predicts a Bear market the EMV of the Bonds alternative,using revised probabilities,is ___.

A)$36,600
B)$24,600
C)$56,800
D)$48,200
E)$45,800

Question 72

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets: If the advisor predicts a Bear market the EMV of the Stocks alternative,using revised probabilities,is ___.

A)$132,300
B)-$73,900
C)$127,600
D)-$99,800
E)$100,000

Question 73

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets: The EMV of this investment opportunity with the advisor's prediction is ___.

A)$167,379
B)$174,200
C)$153,900
D)$136,700
E)$140,011

Question 74

Frank Forgione has the right to enter a contest where he has a 50% chance of winning $50,000 and a 50% chance of losing $0.It costs Frank nothing to enter the contest.If he is willing to give up his right to enter the contest for a sure payment of $10,000,he is ___.

A)a risk avoider
B)an optimist
C)a risk taker
D)risk neutral (an EMV'er)
E)a gambler

Question 75

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives
And constructed the following tables which show (1)expected profits (in $10,000's)for
Various market conditions and their probabilities,and (2)the advisor's track record on
Predicting Bull and Bear markets:
If the advisor predicts a Bull market the EMV of the Bonds alternative,using revised probabilities,is ___.

A)$85,240
B)$25,710
C)$108,450
D)$75,480

Question 76

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste.She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities: The expected value of perfect information is ___.

A)$420,000
B)$570,000
C)$660,000
D)$720,000
E)$890,000

Question 77

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets: If the advisor predicts a Bull market,the revised probability of a Bull market,P (S₁|F₁),is ___.

A)0.877
B)0.894
C)0.953
D)0.923
E)1.000

Question 78

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather.His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets: If the advisor predicts a Bear market the revised probability of a Bear market,P (S₂|F₂),is ___.

A)0.524
B)0.636
C)0.784
D)0.812
E)0.000