Deck 19: Decision Theory

Question 1

True or False The minimax regret criterion specifies selection of the alternative with the lowest maximum regret.

Answer 1

True

Question 2

True or False The maximax criterion specifies that we select the decision alternative having the highest maximum payoff.

Answer 2

True

Question 3

True or False Incremental analysis is a technique especially useful for inventory decisions.

Answer 3

True

Question 4

True or False In hypothesis testing,uncertainty is reflected in Type I but not Type II error.

Question 5

True or False Regrets refer to the differences between each payoff and the worst possible payoff if that state of nature were to occur.

Question 6

Which of the following would be considered a state of nature for a business firm?

A) Incentive programs for sales staff
B) Inventory levels
C) Salaries for employees
D) Site for new plant
E) Worker safety laws

Question 7

A person bets his remaining savings on a horse race based on the large payoff if his horse wins.Which of the following decision making criteria does this typify?

A) Maximum
B) Maximax
C) Minimax
D) Minimax regret
E) Maximum expected payoff

Question 8

True or False A decision situation can be expressed as either a payoff table or a decision tree diagram.

Question 9

The level of doubt regarding the decision situation where both the possible states of nature and their exact probabilities of occurrence are known is which of the following?

A) risk
B) uncertainty.
C) ignorance
D) expected payoff
E) state of nature

Question 10

True or False In using the minimax regret criterion,we must first construct a regret table.

Question 11

A homeowner takes out an insurance policy to try to insure against every contingency to avoid catastrophic losses.Which of the following decision making criteria does this typify?

A) Maximum
B) Maximax
C) Minimax
D) Minimax regret
E) Maximum expected payoff

Question 12

True or False The expected opportunity loss for the alternative having the maximum expected payoff is the expected value of perfect information.

Question 13

True or False The maximum criterion specifies that we select the decision alternative having the lowest maximum payoff.

Question 14

A person builds a storm cellar in a region struck consistently with tornadoes.Which of the following decision making criteria does this typify?

A) Maximum
B) Maximax
C) Maximum regret
D) Minimax
E) Maximum opportunity loss

Question 15

True or False The profit if one more unit is stocked and sold is known as marginal profit.

Question 16

True or False Bayesian decision making takes into account the probabilities for the respective states of nature.

Question 17

Which of the following would not be considered a state of nature for a business firm?

A) Federal Reserve regulations.
B) Food and Drug Administration regulations.
C) The number of employees to hire.
D) Minimum wage regulations.
E) What other firms charge for price.

Question 18

True or False In non-Bayesian decision making,the decision rule considers the respective probability of the states of nature.

Question 19

True or False Decisions can never be made without the benefit of knowledge gained from sampling.

Question 20

Which of the following represents behavior of risk avoidance?

A) Bungee jumping.
B) Buying lottery tickets.
C) Entering magazine sweepstakes.
D) Buying a car with an air bag for both front seat occupants.
E) Skydiving.

Question 21

NARRBEGIN: Economy
An investor has constructed the following payoff table for his profit in thousands of dollars.
What is the most the investor should be willing to pay for perfect information about the future state of the economy?
____________________ thousand

Question 22

NARRBEGIN: State of Nature
The following table displays the payoffs (in thousands of dollars)for five different decision alternatives under three possible states of nature:
Calculate the expected opportunity loss for Alternative A (in thousands of dollars).
____________________ thousand

Question 23

The expected value of perfect information is the same as:

A) maximin payoff.
B) maximax payoff.
C) the expected opportunity loss for the best alternative.
D) the expected payoff.
E) the expected payoff with perfect information.

Question 24

A civic organization cooks and serves pancakes once a year as a fundraiser and has done so for the past 25 years.The pancake grill size requires pancakes to be cooked in advance of the orders for them.All labor is donated,but the electricity and pancake supplies cost $0.20 per pancake.Each pancake sells for $0.60.From past records it appears that the distribution of pancake sales is approximately normal with a mean of 3000 and a standard deviation of 450.Cooked,but unsold pancakes are given to anyone who wishes to take them.Find the number of cooked pancakes that will yield the maximum profit for the project.
____________________ pancakes
Remove all commas from your answer before submitting.

Question 25

NARRBEGIN: State of Nature
The following table displays the payoffs (in thousands of dollars)for five different decision alternatives under three possible states of nature:
Calculate the expected value of perfect information (EVPI)in thousands of dollars.
____________________ thousand

Question 26

When Jessica takes the direct route to work,she gets there in 25 minutes if no train is at the railroad crossing.When a train is using the crossing,her travel time is 10 minutes longer.Her alternative is a route that takes 32 minutes to travel,but has no traffic signals or other delays.Assuming that shorter transit times are more desirable,which route will Jessica select if she uses the maximin criterion? Explain.

Question 27

NARRBEGIN: Scenario
A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively.
What is the most the company should be willing to pay for a research study designed to reduce its uncertainty about media and legal developments concerning packaging?
____________________ million

Question 28

What is the most the firm would be willing to pay for a research study designed to reduce its uncertainty about market conditions?
____________________ million

Question 29

The manager of a grocery store pays 60 cents for each rose and sells them for $1.50 each.Roses left at the end of the day are discarded.The daily demand can be approximated by a normal distribution having a mean of 250 and a standard deviation of 40.To maximize his expected profit,how many roses should the manager buy before the market opens each day?
____________________ roses

Question 30

A California mango grower is considering the installation of a heating system to protect his crop in the event of frost during the coming winter.What would be the rows and columns of a payoff table applicable to this decision?
Rows:
Columns:

Question 31

A fruit stand manager must decide how many pounds of bananas to stock weekly.From past records it appears that the demand for bananas is approximately normal with a mean of 1,200 pounds and a standard deviation of 400 pounds.The cost of the bananas is $0.15 per pound and the usual selling price is $0.45 per pound.At the end of each week a hog farmer comes by the fruit stand and purchases any unsold,over-ripened bananas for $0.05 per pound.Calculate the amount of bananas the manager needs to purchase each week to maximize his profit.
____________________ pounds

Question 32

A retailer can purchase units of a perishable item for 75 cents each.The retailer sells the item for $2.00.Unsold items are worthless and will be discarded.If demand for the item can be approximated by a normal distribution having a mean of 150 and a standard deviation of 30,how many units should the retailer stock to maximize expected profit?
____________________ items

Question 33

A silk screen T-shirt Company buys T-shirts and places designs on them.The cost of the T-shirt is $2.00.Placing the designs on shirts costs $3.00.The shirts sell for $12.Unsold shirts are donated to charity.The monthly demand for T-shirts with designs runs at a mean of 400 and a standard deviation of 50 T-shirts and is approximately normally distributed.What is the profit maximizing number of T-shirts to purchase each month?
____________________ T-shirts

Question 34

When Jessica takes the direct route to work,she gets there in 25 minutes if no train is at the railroad crossing.When a train is using the crossing,her travel time is 10 minutes longer.Her alternative is a route that takes 32 minutes to travel,but has no traffic signals or other delays.Assuming that shorter transit times are more desirable,which route will Jessica select if she uses the minimax regret criterion? Explain.

Question 35

Another term for regret is ______________________________.

Question 36

When Jessica takes the direct route to work,she gets there in 25 minutes if no train is at the railroad crossing.When a train is using the crossing,her travel time is 10 minutes longer.Her alternative is a route that takes 32 minutes to travel,but has no traffic signals or other delays.Assuming that shorter transit times are more desirable,which route will Jessica select if she uses the maximax criterion? Explain.

Question 37

NARRBEGIN: State of Nature
The following table displays the payoffs (in thousands of dollars)for five different decision alternatives under three possible states of nature:
Calculate the expected payoff with perfect information (in thousands of dollars).
____________________ thousand

Question 38

Incremental analysis involves the key terms of ______________________________ and ___________________________________.

Question 39

For each of the following,indicate whether the behavior represents the maximin criterion or the maximax criterion.Explain your reasoning.

Question 40

NARRBEGIN: Market Condition
Three different designs are being considered for a new refrigerator,and profits will depend on the combination of the refrigerator design and market condition.The following payoff table summarizes the decision situation,with amounts in millions of dollars.
Assume that the probabilities for the three market conditions are estimated as 0.1,0.6,and 0.3,respectively.Determine the expected payoff value that would be realized if perfect information were available.
____________________ million

Question 41

In what way is the lowest of the expected opportunity losses related to the expected value of perfect information?

Question 42

NARRBEGIN: Market Condition
Three different designs are being considered for a new refrigerator,and profits will depend on the combination of the refrigerator design and market condition.The following payoff table summarizes the decision situation,with amounts in millions of dollars.
Assume that the probabilities for the three market conditions are estimated as 0.1,0.6,and 0.3,respectively.Which design should be selected in order to maximize the firm's expected profit?

Question 43

NARRBEGIN: Market Condition
Three different designs are being considered for a new refrigerator,and profits will depend on the combination of the refrigerator design and market condition.The following payoff table summarizes the decision situation,with amounts in millions of dollars.
What decision will be made using the minimax regret criterion?

Question 44

NARRBEGIN: Tee shirts
Tee Shirts Unlimited is providing shirts for an upcoming sports tournament.They assume demand will be either 2000,3000,4000,or 5000 shirts and they need to decide whether to produce 2000,3000,4000,or 5000 shirts.The payoff for each production/demand combination is shown in the table below.

How many shirts should be produced using the minimax regret criterion?

Question 45

NARRBEGIN: Competitor's Price
ABC Industries is about to launch a new product and must decide to set the price of the product at either high,medium,or low.The annual payoff for ABC will depend on the price set on a competing product that will be introduced in the near future.The table below shows the annual payout for each combination of prices.
Competitor's Price

What price should ABC choose using the maximax criterion?

Question 46

NARRBEGIN: Competitor's Price
ABC Industries is about to launch a new product and must decide to set the price of the product at either high,medium,or low.The annual payoff for ABC will depend on the price set on a competing product that will be introduced in the near future.The table below shows the annual payout for each combination of prices.
Competitor's Price

What price should ABC choose using the maximin criterion?

Question 47

Using the opportunity loss approach,which alternative will be selected,and what is its expected opportunity loss?
EOL is ____________________ thousand

Question 48

NARRBEGIN: Competitor's Price
ABC Industries is about to launch a new product and must decide to set the price of the product at either high,medium,or low.The annual payoff for ABC will depend on the price set on a competing product that will be introduced in the near future.The table below shows the annual payout for each combination of prices.
Competitor's Price

What price should ABC choose using the minimax regret criterion?

Question 49

NARRBEGIN: Market Condition
Three different designs are being considered for a new refrigerator,and profits will depend on the combination of the refrigerator design and market condition.The following payoff table summarizes the decision situation,with amounts in millions of dollars.
What decision will be made using the maximin criterion?

Question 50

If the probability of the competitor setting their price High,Medium,and Low is 40%,25%,and 35% respectively,which price provides ABC with the highest expected payoff?

Question 51

With the probabilities for the three market conditions estimated as 0.1,0.6,and 0.3,respectively,what is the expected opportunity loss (EOL)associated with each of the three decision alternatives?
Design A: ____________________ million
Design B: ____________________ million
Design C: ____________________ million

Question 52

Determine the expected opportunity loss (EOL)from investing in each company.
Company A: ____________________ thousand
Company B: ____________________ thousand
Company C: ____________________ thousand

Question 53

NARRBEGIN: Tee shirts
Tee Shirts Unlimited is providing shirts for an upcoming sports tournament.They assume demand will be either 2000,3000,4000,or 5000 shirts and they need to decide whether to produce 2000,3000,4000,or 5000 shirts.The payoff for each production/demand combination is shown in the table below.

How many shirts should be produced using the maximin criterion?

Question 54

The probabilities for demand levels 2000,3000,4000,and 5000 have been estimated to be 20%,40%,15%,and 25% respectively.Which is the expected value of perfect information?

Question 55

NARRBEGIN: Market Condition
Three different designs are being considered for a new refrigerator,and profits will depend on the combination of the refrigerator design and market condition.The following payoff table summarizes the decision situation,with amounts in millions of dollars.
What decision will be made using the maximax criterion?

Question 56

If the probability of the competitor setting their price High,Medium,and Low is 40%,25%,and 35% respectively,what is the expected value of perfect information?

Question 57

NARRBEGIN: Tee shirts
Tee Shirts Unlimited is providing shirts for an upcoming sports tournament.They assume demand will be either 2000,3000,4000,or 5000 shirts and they need to decide whether to produce 2000,3000,4000,or 5000 shirts.The payoff for each production/demand combination is shown in the table below.

How many shirts should be produced using the maximax criterion?

Question 58

NARRBEGIN: Market Condition
Three different designs are being considered for a new refrigerator,and profits will depend on the combination of the refrigerator design and market condition.The following payoff table summarizes the decision situation,with amounts in millions of dollars.
Convert the payoff table to a regret table

Question 59

NARRBEGIN: Economy
An investor has constructed the following payoff table for his profit in thousands of dollars.
Construct the regret matrix.

Question 60

The probabilities for demand levels 2000,3000,4000,and 5000 have been estimated to be 20%,40%,15%,and 25% respectively.Which production level provides the largest expected payoff?

Question 61

Why should we bother determining the expected value of perfect information when such information is practically never available?

Question 62

What are the differences among risk,uncertainty,and ignorance? Into which category of decision situation do most business decisions fall?

Question 63

What is meant when we say that the states of nature in the payoff table must be mutually exclusive and exhaustive?

Question 64

NARRBEGIN: Scenario
A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively.
What decision will be made using the minimax regret criterion?

Question 65

NARRBEGIN: Canoe rentals
John's Canoe Rentals leases canoes each day from a supplier and rents them to customers who use them to float down the Delaware River.Each day,John can lease 10,20,or 30 canoes from his supplier.John assumes daily demand will be either 10,20,or 30 canoes.The payoff table for each lease/demand combination is shown below.

How many canoes should be leased using the maximax criterion?

Question 66

NARRBEGIN: Scenario
A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively.
Which decision has the minimum expected opportunity loss?

Question 67

NARRBEGIN: Scenario
A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively.
What decision will be made using the maximax criterion?

Question 68

Define expected payoff of a decision alternative.

Question 69

Define payoff table.

Question 70

NARRBEGIN: State of Nature
The following table displays the payoffs (in thousands of dollars)for five different decision alternatives under three possible states of nature:
Based on the expected opportunity loss criterion,what is the best decision alternative?

Question 71

A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively.
Develop a payoff table for this decision situation.

Question 72

NARRBEGIN: Canoe rentals
John's Canoe Rentals leases canoes each day from a supplier and rents them to customers who use them to float down the Delaware River.Each day,John can lease 10,20,or 30 canoes from his supplier.John assumes daily demand will be either 10,20,or 30 canoes.The payoff table for each lease/demand combination is shown below.

How many canoes should be leased using the minimax regret criterion?

Question 73

Define the Expected Value of Perfect Information.

Question 74

NARRBEGIN: Scenario
A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively.
What decision will be made to maximize expected payoff?

Question 75

A new car salesman is being paid a straight salary,but has the choice to (a)continue with straight salary,(b)change to straight commission,or (c)change to a combination that includes a lower base salary and a commission on each sale of a new car.What states of nature might be useful in constructing a payoff table for this situation?

Question 76

NARRBEGIN: Scenario
A company must decide whether or not to change its packaging now to a more environmentally safe material.The impact of the decision on profits depends on which future scenario develops.Scenario 1 is that the media does not focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $30 million if they change their packaging now,but will make $70 million if they do not change their packaging now.Scenario 2 is that the media does focus heavily on concerns about packaging and no new laws requiring changes in packaging are passed.Under this scenario,the company will make $45 million if they change their packaging now,but will make $50 million if they do not change their packaging now.Scenario 3 is that the media does focus heavily on concerns about packaging and new laws requiring changes in packaging are passed.Under this scenario,the company will make $55 million if they change their packaging now,but will make only $10 million if they do not change their packaging now.The probabilities of the three scenarios are 0.3,0.5,and 0.2,respectively.
What decision will be made using the maximin criterion?

Question 77

NARRBEGIN: Canoe rentals
John's Canoe Rentals leases canoes each day from a supplier and rents them to customers who use them to float down the Delaware River.Each day,John can lease 10,20,or 30 canoes from his supplier.John assumes daily demand will be either 10,20,or 30 canoes.The payoff table for each lease/demand combination is shown below.

John assumes the probabilities for demand levels of 10,20,and 30 canoes is 40%,25%,and 35% respectively.Which leasing alternative will provide the largest expected payoff?

Question 78

The manager of a small local airport must extend a runway if business jets are to be accommodated.However,the residents living close to the airport are already complaining to the city council about the volume and noise of existing air traffic at the facility.Identify the decision alternatives and the possible states of nature that might occur after the decision is made.

Question 79

NARRBEGIN: Canoe rentals
John's Canoe Rentals leases canoes each day from a supplier and rents them to customers who use them to float down the Delaware River.Each day,John can lease 10,20,or 30 canoes from his supplier.John assumes daily demand will be either 10,20,or 30 canoes.The payoff table for each lease/demand combination is shown below.

How many canoes should be leased using the maximin criterion?

Question 80

NARRBEGIN: Canoe rentals
John's Canoe Rentals leases canoes each day from a supplier and rents them to customers who use them to float down the Delaware River.Each day,John can lease 10,20,or 30 canoes from his supplier.John assumes daily demand will be either 10,20,or 30 canoes.The payoff table for each lease/demand combination is shown below.

John assumes the probabilities for demand levels of 10,20,and 30 canoes is 40%,25%,and 35% respectively.What is the expected value of perfect information?