Deck 20: An Introduction to Decision Theory

Question 1

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 expected value of perfect information.

Answer 1

True

Question 2

Optimists advocate a maximax strategy.

Answer 2

True

Question 3

A state of nature is an uncertain, future event.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

What is another term for a payoff or consequence? _________________

Question 11

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

Question 12

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

Question 13

In a payoff table, what is another name for alternatives? _______

Question 14

What is the difference between the expected monetary value under conditions of certainty and the expected monetary value under uncertainty called? ___________

Question 15

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 16

Maximizers advocate a maximin strategy.

Question 17

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

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

Optimists advocate a maximin strategy.

Question 21

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

Question 22

Which decision making strategy maximizes the minimum gain? _____________

Question 23

What is a graph of all the possible courses of action and their consequent possible outcomes called? ________________

Question 24

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 25

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

Question 26

The maximax strategy is an ________ strategy for decision making.

Question 27

Which decision-making strategy maximizes the maximum gain? ________________

Question 28

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

Question 29

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

Question 30

What is the potential loss associated with a future state of nature called? ________________________

Question 31

What is the average return for a particular act or decision alternative called? ____________________

Question 32

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

Question 33

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) expected value of perfect information.
D) decision tree.

Question 34

What is the potential loss for an uncertain state of nature called? ________________

Question 35

What is the most optimistic of all possible decision making strategies?

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

Question 36

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

Question 37

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

Question 38

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 39

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 40

The maximin strategy is a __________ strategy for decision making.

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 6 and 9 of them. What is the payoff value for the purchase of 9 watermelons when the demand is for 6 watermelons?

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

Question 42

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 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 6 and 9 of them. What is the payoff value for the purchase of 9 watermelons when the demand is for 7 watermelons?

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

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 6 and 9 of them. What is the payoff value for the purchase of 8 watermelons when the demand is for 7 watermelons?

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

Question 45

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 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 6 and 9 of them. What is the payoff value for the purchase of 8 watermelons when the demand is for 8 or more watermelons?

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

Question 47

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 6 and 9 of them. What is the payoff value for the purchase of 7 watermelons when the demand is for 6 watermelons?

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

Question 48

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 6 and 9 of them. What is the opportunity loss for purchasing 6 watermelons when the demand is for 6 watermelons?

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

Question 49

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 6 and 9 of them. What is the opportunity loss for purchasing 7 watermelons when the demand is for 9 watermelons?

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

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 6 and 9 of them. What is the payoff value for the purchase of 7 watermelons when the demand is for 7 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 6 and 9 of them. What is the opportunity loss for purchasing 8 watermelons when the demand is for 8 watermelons?

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

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 6 and 9 of them. What is the payoff value for the purchase of 6 watermelons when the demand is for 6 watermelons?

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

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 6 and 9 of them. What is the payoff value for the purchase of 9 watermelons when the demand is for 8 watermelons?

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

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 6 and 9 of them. What is the payoff value for the purchase of 8 watermelons when the demand is for 6 watermelons?

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

Question 55

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 6 and 9 of them. What is the payoff value for the purchase of 9 watermelons when the demand is for 9 watermelons?

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

Question 56

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 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 6 and 9 of them. What is the opportunity loss for purchasing 7 watermelons when the demand is for 6 watermelons?

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

Question 58

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

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

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 6 and 9 of them. What is the opportunity loss for purchasing 6 watermelons when the demand is for 8 watermelons?

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

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 6 and 9 of them. What is the payoff value for the purchase of 6 watermelons when the demand is for 7 or more watermelons?

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

Question 61

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the opportunity loss table showing the potential lost profit for each purchase decision or act from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing 1 dozen T-shirts?

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

Question 62

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing 1 dozen T-shirts?

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

Question 63

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 6 and 9 of them. What is the opportunity loss for purchasing 8 watermelons when the demand is for 9 watermelons?

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

Question 64

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 6 and 9 of them. Based on a maximax decision strategy, what alternative is selected?

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

Question 65

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 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 66

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 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 67

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing 4 dozen T-shirts?

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

Question 68

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the opportunity loss table showing the potential lost profit for each purchase decision or act from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing 3 dozen T-shirts?

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

Question 69

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing 2 dozen T-shirts?

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

Question 70

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 6 and 9 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 71

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the opportunity loss table showing the potential lost profit for each purchase decision or act from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing 2 dozen T-shirts?

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

Question 72

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 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 73

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected payoff for purchasing 3 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 6 and 9 of them. If the merchant purchases 7 watermelons, the maximum opportunity loss occurs when the demand is how many units?

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

Question 75

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the opportunity loss table showing the potential lost profit for each purchase decision or act from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. What is the expected opportunity loss of purchasing 4 dozen T-shirts?

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

Question 76

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 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 77

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the payoff table shown below, giving the estimated profit when a retailer purchases from 1 to 4 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 78

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the opportunity loss table showing the potential lost profit for each purchase decision or act from 1 to 4 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 79

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 6 and 9 of them. What is the opportunity loss for purchasing 9 watermelons when the demand is for 7 watermelons?

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

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 6 and 9 of them. If the merchant purchases 8 watermelons, the minimum opportunity loss occurs when the demand is how many units?

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