Deck 23: Decision Analysis

Question 1

The expected value concept weighs each payoff for an alternative in proportion to the likelihood that the payoff will occur.

Answer 1

True

Question 2

A conservative or risk-averse approach to one-time decisions without event probabilities is ____.

A)Maximax
B)Maximin
C)Minimax regrets
D)Expected value

Answer 2

B

Question 3

Considering decision trees, which of the following statements is not correct?

A)A decision tree is a graphical schematic of the logical order with which decisions are made when events occur
B)Decision trees are useful for more complex business decisions
C)Working forward through the decision tree, the expected monetary value of each event node is computed by first weighting possible payoffs by their changes of occurrence
D)Expected value calculations can be made directly on the tree to arrive at the best decision

Answer 3

C

Question 4

Risk is a form of uncertainty associated with an unexpected good or undesirable outcome.

Question 5

Uncertainty refers to not knowing what will happen in the future.Which of the following least applies to uncertainty?

A)Usually does not involve a sequence of decisions
B)Little or no data available
C)Some data is very expensive
D)Some data is time-consuming to obtain

Question 6

The expected value of perfect information represents the maximum amount a company should be willing to pay for any information about events, no matter how good it is.

Question 7

All of the following are characteristics of management decisions for which decision analysis techniques apply except

A)They must be important
B)They are probably unique
C)They are usually deterministic
D)They are complex

Question 8

For decisions repeated over-and-over again, managers can choose those based upon the expected payoff that might occur.

Question 9

A numerical value associated with a decision coupled with some event is called a decision tree.

Question 10

Decision analysis situations often have multiple objectives.

Question 11

Making decisions in an emergency room of a hospital is an example of a decision analysis situation.

Question 12

____ represent a future outcome that can occur after a decision is made that are not under the control of the decision-maker.

A)Decision alternatives
B)Events
C)Payoffs
D)Probabilities

Question 13

Which of the following is best related to the expected value approach?

A)Best used for one-time decisions
B)Since there are many states of nature, the individual probabilities, when added, can be greater than 1.0
C)It is an average
D)Probabilities are not appropriate

Question 14

Opportunity loss or ill-feeling that people often have after making a nonoptimal decision is best related to

A)Maximax
B)Maximin
C)Minimax regrets
D)Expected value

Question 15

Managers don't often have the information necessary to find optimal solutions to business problems.

Question 16

With some modification, the decision rules for one-time decisions without event probabilities can be applied to situations where the payoff is cost.

Question 17

An aggressive or risk-taking approach to one-time decisions without probabilities is called maximin.

Question 18

The expected value of a decision alternative cannot be negative.

Question 19

The minimax regret approach is neither aggressive nor conservative.

Question 20

Regarding the concept of the expected value of perfect information,

A)Expected value of perfect information means knowing in advance what state of nature will occur
B)Perfect information is easy to obtain
C)Expected value of perfect information is calculated by adding the expected payoff under perfect information to the expected payoff of the optimal decision without perfect information
D)It can be calculated without the use of probabilities

Question 21

A regional fast-food restaurant is considering an expansion program.The major factor influencing the success of such a program is the future level of interest rates.It is estimated that there is a 20 percent chance that interest rates will increase by 2 percentage points, a 50 percent chance that they will remain the same, and a 30 percent chance that they will decrease by 2 percentage points.The alternatives they are considering and possible payoffs are shown in the following table:

a.Using decision tree analysis, what is the expected value for building 50 new restaurants?
b.Using decision tree analysis, what is the expected value for building 25 new restaurants?
c.What is the action and corresponding EV for this overall decision tree problem?

Question 22

The expected value criteria is a good tool if

A)The decision will be made only one time
B)The decision will be made over-and-over again
C)The decision will be made under conditions of certainty
D)The decision has to be made quickly

Question 23

Differentiate between uncertainty and risk.

Question 24

In what type of situation would the expected monetary value criterion be useful? In what type situation would it not be useful?

Question 25

Explain the structure and purpose of a decision tree.

Question 26

Define the four major elements of a decision problem.

Question 27

Elements common to decision-making in all models do not include

A)Criteria
B)Knowledge about states of nature
C)Measures of benefit (profit or loss) to the decision-maker
D)Expected Value (EV)

Question 28

In the following profit table, d_i represents decision variables and S_i represents states of nature.
a.If management assigns probabilities as follows: S₁ = 0.15; S₂ = 0.25; S₃ = 0.40; and S₄ = 0.20, determine the expected value for d₂.
b.Determine the expected value for d₃.
c.Assuming the largest expected value for a decision variable is 24.00, determine the value of perfect information.

Question 29

Jumbo James sells hotdogs out of a cart for $3.00 each.His cost to purchase and prepare the hotdog is $1.15 each.He operates the small business with very few capital assets and has no place to store unsold hotdogs.For this reason, every evening he sells the unsold hotdogs to a local homeless shelter for $0.50 each.Jumbo James will choose one of the following options as a standard stocking plan: d₁ = 100; d₂ = 150; or d₃ = 200 hot dogs.On any weekday, the demand for hot dogs and the probability of selling them is estimated as follows:

a.Determine the expected value if Jumbo James stocks 200 hot dogs every day.
b.Determine the expected value if Jumbo James decides to stock 150 hot dogs every day.

Question 30

Describe how the following criteria are applied to a decision problem in which the objective is minimization.
a.Maximax
b.Maximin
c.Minimax regrets

Question 31

A decision-maker has decided to expand her operations and become more efficient.Decision variable d₁ is to do nothing; d₂ is a moderate expansion; and d₃ is a major expansion.
a.Determine the expected value of d₂ if the states of nature are S₁ = 0.25; S₂ = 0.60; and S₃ = 0.15.
b.Determine the expected value for d₃ if the states of nature are S₁ = 0.25; S₂ = 0.60; and S₃ = 0.15.

Question 32

Discuss the five characteristics of management decisions when decision analysis techniques should be utilized.

Question 33

The decision criterion, for a one-time decision without event probabilities, that is neither aggressive nor conservative is

A)maximax
B)maximin
C)minimax regret
D)expected value

Question 34

Explain the Expected Value of Perfect Information (EVPI) and how it helps a decision-maker.

Question 35

A model that starts with the future-most point and moves toward the current time period is called a ____.

A)Payoff table
B)Maximax decision
C)Decision tree
D)Satisficing

Question 36

A company is expanding its production capacity.The decision will depend upon whether the increase in demand is low, medium or high.The company's choices for expansion are small, medium, large or very large.The following table provides an estimate of profits over the next two years.

a.Which decision variable would be picked using maximax?
b.Which decision variable would be picked using maximin?
c.Which decision variable would be picked using minimax regrets criteria?
d.Suppose the decision-maker assigns the probability of low-demand as 0.2, medium-demand as 0.5 and high-demand as 0.3.Which decision variable would be picked using the expected value criterion?

Question 37

Describe how the following criteria are applied to a decision problem in which the object is maximization.
a.Maximax
b.Maximin
c.Minimax regrets

Question 38

Which of the following is not a similarity between a decision matrix and a decision tree?

A)Time
B)States of nature
C)Alternatives
D)Probabilities

Question 39

The following table shows cost payoffs for four decision variables and four states of nature.
a.Which decision variable would be selected using minimin criteria?
b.Remembering that the data represents cost, which decision variable would be selected using minimax?
c.Remembering that the data represents cost, which decision variable would be selected using minimax-regrets criteria.
d.Suppose the decision-maker assigns the probability for S₁ = 0.10; S₂ = 0.25; S₃ = 0.45; and S₄ = 0.20, which decision variable would be picked using the expected value criterion?

Question 40

Given the following table, calculate the expected value of perfect information.

Question 41

A chemical company is trying to decide whether to build a pilot plant now for a new chemical process or to build the full plant now.If they build a pilot plant now, they could expand it later to a full plant or license the plant to another company.It would cost them $2 million to build the pilot plant and another $2 million later to expand it.If they build the full plant now it would cost $3.5 million to construct.The returns they expect to get from the full production plant depend upon the market.
They estimate there is a 60% chance the market will be robust, a 30% chance it will remain stable, and a 10% chance it will become stagnate.The returns are estimated to be $5 million if it is robust, $3 million if it is stable, and $1 million if it is stagnate.Before they expand the pilot plant, they plan to conduct a comprehensive study.Based on past experience, they expect the study to report a 60% chance of favorable outcome for expansion and a 40% unfavorable chance.In either case they will have to decide whether to expand to a full plant or license the pilot plant.If the report is favorable and they license it, they expect to get $3 million.However, if the report is unfavorable and they license it, they will only get $1 million.
a.Using decision tree analysis, what is the expected value for building the full plant now?
b.Using decision tree analysis, what is the value of the decision on expanding the pilot plant assuming the report is favorable?
c.What should the company do and what is the expected value of that decision?

Question 42

A major retail clothing store is considering whether to open a new store on the other side of town or wait one year and then open the store.In the meantime, they have paid $10,000 for a one year option on a building.If they open the store now it will cost $140,000 to refurbish it, but it will cost $160,000 if they wait one year.They expect sales to depend on the economy in the area at the time they open the store.If they go ahead now, there is a 50% chance the economy will go up, 30% it will stay the same, and 20% it will go down.They then expect the following returns: if the economy goes up $200,000; stays the same $160,000; and goes down -$20,000.
If they wait one year, they can either open the store then or not open the store and let the option expire.If the option expires, they will lose the $10,000.One year from now they expect there is a 40% chance the economy will go up, 30% stay the same, and 30% go down.The returns they expect to get would then be: if the economy goes up $180,000; stays the same $160,000; and goes down -$30,000.
a.Using decision tree analysis, what is the expected value of opening the store now?
b.Using decision tree analysis, what is the expected value of waiting one year to open the store?
c.What should the company do and what is the expected value of that decision?

Question 43

A paint company has three sources for buying bright red pigment for their paints: Vietnam, Taiwan, or Thailand.Unfortunately, the pigment is made from a bush whose annual growth is heavily dependent upon the amount of rainfall during the growing season.The tables below show probabilities and prices for wet, dry and normal growing seasons:

a.Using decision tree analysis, what is the expected value (price) for Thailand?
b.What country should the company select and what is the expected value (price) associated with it?

Question 44

A Pacific Northwest lumber company is considering the expansion of one of its mills.The question is whether to do it now, or wait for one year and re?consider.If they expand now, the major factors of importance are the state of the economy and the level of interest rates.The combination of these two factors results in five possible situations.If they do not expand now, only the state of the economy is important and three conditions characterize the possibilities.The following table summarizes the situation:

a.Using decision tree analysis, what is the expected value for expanding?
b.Using decision tree analysis, what is the expected value for not expanding?
c.Based on expected value, what should the company's decision(s) be?