Deck 17: Decision-Making Tools

Question 1

The first step in the analytic decision process is to clearly define the problem and the factors that influence it.

Answer 1

True

Question 2

What is a tabular presentation that shows the outcome for each decision alternative under the various possible states of nature called?

A) payoff tree
B) payback period matrix
C) decision table
D) feasible region
E) decision tree

Answer 2

C

Question 3

A(n) ________ is an occurrence or situation over which the decision maker has little or no control.

Answer 3

state of nature

Question 4

The following decision tree has how many state-of-nature nodes?

A) 0
B) 1
C) 2
D) 3
E) 4

Question 5

In the context of decision making, define a state of nature.

Question 6

In terms of decision theory, an occurrence or situation over which the decision maker has no control is called a(n):

A) decision under uncertainty.
B) decision tree.
C) state of nature.
D) alternative.
E) EMV.

Question 7

Which of the following is NOT considered a step in the decision-making process?

A) Clearly define the problem and the factors that influence it.
B) Select the best alternative.
C) Develop specific and measurable objectives.
D) Evaluate each alternative solution based on its merits and drawbacks.
E) Minimize costs whenever possible.

Question 8

In the context of decision-making, define an alternative.

Question 9

The first step, and a key element, in the decision-making process is to:

A) consult a specialist.
B) clearly define the problem.
C) develop objectives.
D) monitor the results.
E) select the best alternative.

Question 10

Identify, in order, the six steps of analytical decision making.

Question 11

An example of a conditional value would be the payoff from selecting a particular alternative when a particular state of nature occurs.

Question 12

Analytic decision making is based on logic and considers all available data and possible alternatives.

Question 13

A square node on a decision tree infers that:

A) the node splits into various states of nature, of which only one will occur.
B) there are several alternatives available.
C) the manager must choose an alternative.
D) Both B and C
E) A, B, and C

Question 14

The last step of the decision-making process is to:

A) develop a model.
B) evaluate each alternative.
C) select the best alternative.
D) implement the decision.
E) check the decision with senior management.

Question 15

In a decision tree, a round symbol represents a state of nature node.

Question 16

A state of nature is an occurrence or a situation over which the decision maker has little or no control.

Question 17

The square symbol used in drawing a decision tree represents a(n) ________ node.

Question 18

The last step in the analytic decision process is to select the best alternative.

Question 19

The most critical step in the analytic decision process is to minimize the total cost.

Question 20

Explain the symbols used in decision tree analysis.

Question 21

A decision maker who uses the maximax criterion when solving a problem under conditions of uncertainty is:

A) an optimist.
B) a pessimist.
C) an economist.
D) an optometrist.
E) making a serious mistake; maximax is not appropriate for conditions of uncertainty.

Question 22

What are decision tables?

Question 23

A retailer is deciding how many units of a certain product to stock. The historical probability distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product costs $11 per unit and sells for $25 per unit. What is the conditional value for the decision alternative "Stock 3" and state of nature "Sell 1"?

A) 1.4 units
B) $1 profit
C) $25 profit
D) $-8 profit
E) $23.80 profit

Question 24

What decision criterion would be used by a pessimistic decision maker solving a problem under conditions of uncertainty?

A) expected monetary value
B) equally likely
C) maximax
D) maximin
E) minimin

Question 25

An example of expected monetary value would be the payoff from selecting a particular alternative when a particular state of nature occurs.

Question 26

The expected value with perfect information assumes that all states of nature are equally likely.

Question 27

A retailer is deciding how many units of a certain product to stock. The historical probability distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product costs $8 per unit and sells for $33 per unit. What is the largest conditional value (profit) in the entire payoff table for this scenario?

A) $-24 profit
B) $42 profit
C) $9 profit
D) $51 profit
E) $75 profit

Question 28

Doing nothing would yield how much profit if favorable market conditions prevail according to the following profit decision table?

A) $5,000
B) $20,000
C) -$10,000
D) $0
E) $10,000

Question 29

If a decision maker knows for sure which state of nature will occur, he/she is making a decision under certainty.

Question 30

A retailer is deciding how many units of a certain product to stock. The historical probability distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product costs $10 per unit and sells for $33 per unit. What is the smallest conditional value (profit) in the entire payoff table for this scenario?

A) $-30 profit
B) $3 profit
C) $36 profit
D) $66 profit
E) $75 profit

Question 31

The maximin criterion is optimistic, while the maximax criterion is pessimistic.

Question 32

Expected monetary value is most appropriate for problem solving that takes place:

A) when conditions are average.
B) when all states of nature are equally likely.
C) when all alternatives are equally likely.
D) under conditions of uncertainty.
E) under conditions of risk.

Question 33

The expected value of perfect information is the same as the expected value with perfect information.

Question 34

What is a conditional value?

Question 35

A(n) ________ is a tabular means of analyzing decision alternatives and states of nature.

Question 36

If a decision maker can assign probabilities of occurrences to the states of nature, then the decision-making environment is Decision Making under Uncertainty.

Question 37

What is the outcome of an alternative/state of nature combination called?

A) price
B) conditional value
C) expected value
D) conditional probability
E) conditional expectation

Question 38

The expected monetary value of a decision alternative is the sum of all possible payoffs from the alternative, each weighted by the probability of that payoff occurring.

Question 39

If a decision maker has to make a particular decision only once, expected monetary value is a good indication of the payoff associated with the decision.

Question 40

The maximax criterion of decision making requires that all decision alternatives have an equal probability of occurrence.

Question 41

For the following decision table, the highest value for the equally likely criterion is ________; this occurs with alternative ________.

A) $20,000; Option 1
B) $30,000; Option 2
C) $28,000; Option 3
D) $32,000; Option 3
E) $60,000; Option 2

Question 42

What is the EMV for Option 1 in the following decision table?

A) 220
B) 240
C) 250
D) 280
E) 300

Question 43

What is the expected value with perfect information in the following decision table?

A) 90
B) 250
C) 260
D) 300
E) 340

Question 44

What is the EMV for Option 3 in the following decision table?

A) 5,000
B) 21,000
C) 25,000
D) 29,000
E) 34,400

Question 45

The expected value with perfect information is:

A) the maximum EMV for a set of alternatives.
B) the same as the expected value of perfect information.
C) the difference between the payoff under perfect information and the payoff under risk.
D) the expected return obtained when the decision maker knows which state of nature is going to occur before the decision is made.
E) obtained using conditional probabilities.

Question 46

What is the difference between the expected payoff under perfect information and the maximum expected payoff under risk?

A) expected monetary value
B) economic order quantity
C) expected value of perfect information
D) PERT
E) expected monetary payoff

Question 47

What is the EMV for Option 2 in the following decision table?

A) 50
B) 100
C) 170
D) 200
E) 350

Question 48

Which of the following options has the maximum EMV?

A) Option 1
B) Option 2
C) Option 3
D) Option 4
E) Option 5

Question 49

The expected value of perfect information (EVPI) is the:

A) payoff for a decision made under perfect information.
B) payoff under minimum risk.
C) average expected payoff.
D) difference between the payoff under perfect information and the payoff under risk.
E) greater of EVwPI and Maximum EMV.

Question 50

What is the EMV for Option 1 in the following decision table?

A) 10,000
B) 18,000
C) 20,000
D) 22,000
E) 30,000

Question 51

There are three equally likely states of nature (High, Medium, and Low demand). If the large factory will post profits of $60,000, $25,000, and -$10,000 under these states of nature, respectively, what is the EMV of the factory?

A) $50,000
B) $25,000
C) $28,333.33
D) $21,666.67
E) $65,000

Question 52

A decision maker using the maximin criterion on the problem below would choose Alternative ________ because the maximum of the row minimums is ________.

A) A; 55
B) B; 80
C) C; 70
D) D; 140
E) D; 10

Question 53

A decision maker using the maximax criterion on the problem below would choose Alternative ________ because the maximum of the row maximums is ________.

A) A; 60
B) B; 80
C) C; 70
D) D; -100
E) D; 140

Question 54

What is the EMV for Option 1 in the following decision table?

A) 15,000
B) 16,500
C) 17,500
D) 18,500
E) 20,000

Question 55

What is the EMV for Option 2 in the following decision table?

A) 10,000
B) 16,000
C) 20,000
D) 24,000
E) 30,000

Question 56

A plant manager wants to know how much she should be willing to pay for perfect market research. Currently there are two states of nature facing her decision to expand or do nothing. Under favorable market conditions the manager would make $100,000 for the large plant and $5,000 for the small plant. Under unfavorable market conditions the large plant would lose $80,000 and the small plant would make $0. If the two states of nature are equally likely, how much should she pay for perfect information?

A) $0
B) $25,000
C) $40,000
D) $100,000
E) $145,000

Question 57

The expected value with perfect information:

A) equals EVPI - Maximum EMV.
B) requires that each decision alternative have a known probability of occurrence.
C) is an input into the calculation of the expected value of perfect information.
D) is the average of the maximax and the maximin.
E) none of these

Question 58

What is the expected value of perfect information of the following decision table?

A) 0
B) 20
C) 50
D) 150
E) 200

Question 59

What is the expected value with perfect information of the following decision table?

A) 5,000
B) 30,000
C) 40,000
D) 60,000
E) 8,400

Question 60

The likelihood that a decision maker will ever receive a payoff precisely equal to the EMV when making any one decision is:

A) low (near 0%).
B) high (near 100%).
C) dependent upon the number of alternatives.
D) dependent upon the number of states of nature.
E) none of these

Question 61

How is the expected value of perfect information (EVPI) found?

Question 62

Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 50% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 30% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.
Calculate the expected monetary value for each decision alternative. Which decision yields the highest EMV?

Question 63

Identify and describe three methods used for decision making under conditions of uncertainty.

Question 64

________ is the criterion for decision making under uncertainty that finds an alternative that maximizes the minimum outcome.

Question 65

An operations manager's staff has compiled the information below for four manufacturing alternatives (E, F, G, and H) that vary by production technology and the capacity of the machinery. All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars. Forecasts indicate that there is a 0.1 probability of acceptance level 1, 0.2 chance of acceptance level 2, 0.4 chance of acceptance level 3, and 0.3 change of acceptance level 4.
Using the criterion of expected monetary value, which production alternative should be chosen?

Question 66

The campus bookstore sells stadium blankets embroidered with the university crest. The blankets must be purchased in bundles of one dozen each. Each blanket in the bundle costs $65, and will sell for $90. Blankets unsold by homecoming will be clearance priced at $20. The bookstore estimates that demand patterns will follow the table below.
(a) Build the decision table.
(b) What is the maximum expected monetary value?
(c) How many bundles should be purchased?

Question 67

A toy manufacturer has three different mechanisms that can be installed in a doll that it sells. The different mechanisms have three different setup costs (overheads) and variable costs and, therefore, the profit from the dolls is dependent on the volume of sales. The anticipated payoffs are as follows.
(a) What is the EMV of each decision alternative?
(b) Which action should be selected?
(c) What is the expected value with perfect information?
(d) What is the expected value of perfect information?

Question 68

The construction manager for Acme Construction, Inc. must decide whether to build single family homes, apartments, or condominiums. This is not a product-mix problem, but an all-or-nothing decision. He will hire workers and rent equipment appropriate for one action only. He estimates annual profits (in thousands of dollars) will vary with population trends as follows:
(a) If he uses the maximin criterion, which type of dwellings will he choose to build? Show your supporting calculations.
(b) If he uses the equally likely criterion, which kind of dwellings will he choose to build? Show your supporting calculations.
(c) If the construction manager were an optimist, what criterion would he choose? What would be the choice of dwelling for that criterion? Show your supporting calculations.

Question 69

Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort. The sale of Sno-Cones is highly dependent upon his location and upon the weather. At the resort, he will profit $110 per day in fair weather, $20 per day in foul weather. At home, he will profit $70 in fair weather, $50 in foul weather. Assume that on any particular day, the weather service suggests a 60% chance of fair weather.
(a) Construct Earl's payoff table.
(b) What decision is recommended by the expected monetary value criterion?
(c) What is the EVPI?

Question 70

Define expected monetary value (EMV).

Question 71

Which of the following options has the maximum EMV?

A) Option 1
B) Option 2
C) Option 3
D) Option 4
E) Option 5

Question 72

________ is the criterion for decision making under uncertainty that assigns equal probability to each state of nature.

Question 73

________ is the expected payout or value of a variable that has different possible states of nature, each with an associated probability.

Question 74

If a decision maker is a pessimist, what decision-making criterion is appropriate? Why?

Question 75

________ is the difference between the payoff under perfect information and the payoff under risk.

Question 76

An operations manager's staff has compiled the information below for four manufacturing alternatives (A, B, C, and
D) that vary by production technology and the capacity of the machinery. All choices enable the same level of total production and have the same lifetime. The four states of nature represent four levels of consumer acceptance of the firm's products. Values in the table are net present value of future profits in millions of dollars.

(a) Assuming a maximax strategy, which alternative would be chosen?
(b) If maximin were used, which would be chosen?
(c) If the states of nature were equally likely, which alternative should be chosen?

Question 77

Describe the meaning of EVPI.

Question 78

Which decision rule under uncertainty results in an optimistic decision? Why?

Question 79

Daily sales of bread by Salvador Monella's Baking Company follow the historical pattern shown in the table below. It costs the bakery 80 cents to produce a loaf of bread, which sells for $1.50. Any bread unsold at the end of the day is sold to the parish jail for 25 cents per loaf. Construct the decision table of conditional payoffs. How many loaves should Sal bake each day in order to maximize contribution?

Question 80

Steve Gentry, the operations manager of Baja Fabricators, wants to purchase a new profiling machine (it cuts compound angles on the ends of large structural pipes used in the fabrication yard). However, because the price of crude oil is depressed, the market for such equipment is down. Steve believes that the market will improve in the near future and that the company should expand its capacity. The table below displays the three equipment options he is currently considering, and the profit he expects each one to yield over a two-year period. The consensus forecast at Baja is that there is about a 30% probability that the market will pick up "soon" (within 3 to 6 months) and a 70% probability that the improvement will come "later" (in 9 to 12 months, perhaps longer).
(a) Calculate the expected monetary value of each decision alternative.
(b) Which equipment option should Steve take?