Deck 9: Decision Analysis

Question 1

The maximax approach is an optimistic strategy

Answer 1

True

Question 2

An example of maximax decision making is a person buying lottery tickets in hopes of a very big payoff

Answer 2

True

Question 3

The maximum likelihood criterion says to focus on the largest payoff

Answer 3

False

Question 4

Bayes' decision rule says to choose the alternative with the largest expected payoff

Question 5

Payoffs always represent profits in decision analysis problems

Question 6

Graphical analysis can only be used in sensitivity analysis for those problems that have two decision alternatives

Question 7

Prior probabilities refer to the relative likelihood of possible states of nature

Question 8

A event node in a decision tree indicates that a decision needs to be made at that point

Question 9

Payoff tables may include only non-negative numbers

Question 10

The maximin criterion is an optimistic criterion

Question 11

An advantage of payoff tables compared to decision trees is that they permit us to analyze situations involving sequential decisions

Question 12

Sensitivity analysis may be useful in decision analysis since prior probabilities may be inaccurate

Question 13

The maximin approach involves choosing the alternative that has the "best worst" payoff

Question 14

The maximin approach involves choosing the alternative with the highest payoff

Question 15

Using Bayes' decision rule will always lead to larger payoffs

Question 16

In decision analysis,states of nature refer to possible future conditions

Question 17

A decision tree branches out all of the possible decisions and all of the possible events

Question 18

The maximum likelihood criterion ignores the payoffs for states of nature other than the most likely one

Question 19

The equally likely criterion assigns a probability of 0 5 to each state of nature

Question 20

States of nature are alternatives available to a decision maker

Question 21

Testing how a problem solution reacts to changes in one or more of the model parameters is called:

A)analysis of tradeoffs
B)sensitivity analysis
C)priority recognition
D)analysis of variance
E)decision analysis

Question 22

Two people who face the same problem and use the same decision-making methodology must always arrive at the same decision

Question 23

A utility function for money can be constructed by applying a lottery procedure

Question 24

A posterior probability is a revised probability of a state of nature after doing a test or survey to refine the prior probability

Question 25

The maximin strategy is:

A)Buy
B)Rent
C)Lease
D)High
E)Low

Question 26

Determining the worst payoff for each alternative and choosing the alternative with the "best worst" is the criterion called:

A)minimin
B)maximin
C)maximax
D)maximum likelihood
E)Bayes decision rule

Question 27

The expected value of perfect information is:

A)12
B)55
C)57
D)69
E)90

Question 28

The Bayes' decision rule strategy is:

A)Buy
B)Rent
C)Lease
D)High
E)Low

Question 29

The maximax strategy is:

A)Buy
B)Rent
C)Lease
D)High
E)Low

Question 30

The exponential utility function assumes a constant aversion to risk

Question 31

Utilities can be useful when monetary values do not accurately reflect the true values of an outcome

Question 32

The maximin criterion refers to:

A)minimizing the maximum return
B)maximizing the minimum return
C)choosing the alternative with the highest payoff
D)choosing the alternative with the minimum payoff
E)None of the above

Question 33

Which one of the following statements is not correct when making decisions?

A)The sum of the state of nature probabilities must be 1
B)Every probability must be greater than or equal to 0
C)All probabilities are assumed to be equal
D)Probabilities are used to compute expected values
E)Perfect information assumes that the state of nature that will actually occur is known

Question 34

The maximax strategy is:

A)small
B)medium
C)medium large
D)large
E)extra large

Question 35

A risk seeker has a decreasing marginal utility for money

Question 36

The EVPI indicates an upper limit in the amount a decision-maker should be willing to spend to obtain information

Question 37

Most people occupy a middle ground and are classified as risk neutral

Question 38

The maximum likelihood strategy is:

A)Buy
B)Rent
C)Lease
D)High
E)Low

Question 39

Which of the following is not a criterion for decision making?

A)EVPI
B)Maximin
C)Maximax
D)Bayes' decision rule
E)Maximum likelihood

Question 40

Bayes' theorem is a formula for determining prior probabilities of a state of nature

Question 41

The maximum likelihood strategy is:

A)A
B)B
C)C
D)D
E)E

Question 42

What is the expected annual profit for the dwellings that he will decide to build using Bayes' decision rule?

A)$187,000
B)$132,000
C)$123,000
D)$65,000
E)$55,000

Question 43

The construction manager for ABC Construction must decide whether to build single family homes,apartments,or condominiums.he estimates annual profits (in $000)will vary with the population trend as follows:

If he uses Bayes' decision rule,which kind of dwellings will he decide to build?

A)Single family
B)Apartments
C)Condos
D)Either single family or apartments
E)Either apartments or condos

Question 44

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000) will vary depending upon whether passenger demand is low, moderate, or high, as follows.

If he uses Bayes' decision rule,which size bus will he decide to purchase?

A)Small
B)Medium
C)Large
D)Either small or medium
E)Either medium or large

Question 45

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production.She feels that script #1 has a 70% chance of earning $100 million over the long run,but a 30% chance of losing $20 million.If this movie is successful,then a sequel could also be produced,with an 80% chance of earning $50 million,but a 20% chance of losing $10 million.On the other hand,she feels that script #2 has a 60 % chance of earning $120 million,but a 40% chance of losing $30 million.If successful,its sequel would have a 50% chance of earning $80 million and a 50% chance of losing $40 million.As with the first script,if the original movie is a "flop",then no sequel would be produced.
What would be the total payoff is script #1 were a success,but its sequel were not?

A)$150 million
B)$100 million
C)$90 million
D)$50 million
E)$-10 million

Question 46

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production.She feels that script #1 has a 70% chance of earning $100 million over the long run,but a 30% chance of losing $20 million.If this movie is successful,then a sequel could also be produced,with an 80% chance of earning $50 million,but a 20% chance of losing $10 million.On the other hand,she feels that script #2 has a 60 % chance of earning $120 million,but a 40% chance of losing $30 million.If successful,its sequel would have a 50% chance of earning $80 million and a 50% chance of losing $40 million.As with the first script,if the original movie is a "flop",then no sequel would be produced.
What is the probability that script #1 will be a success,but its sequel will not?

A)0 8
B)0 7
C)0 56
D)0 2
E)0 14

Question 47

The maximin strategy is:

A)A
B)B
C)C
D)D
E)E

Question 48

The Bayes' decision rule strategy is:

A)A
B)B
C)C
D)D
E)E

Question 49

What is his expected value of perfect information?

A)$15,000
B)$61,000
C)$69,000
D)$72,000
E)$87,000

Question 50

The maximin strategy is:

A)small
B)medium
C)medium large
D)large
E)extra large

Question 51

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000) will vary depending upon whether passenger demand is low, moderate, or high, as follows.

If he uses the maximum likelihood criterion,which size bus will he decide to purchase?

A)Small
B)Medium
C)Large
D)Either small or medium
E)Either medium or large

Question 52

What is his expected value of perfect information?

A)$187,000
B)$132,000
C)$123,000
D)$65,000
E)$55,000

Question 53

The maximax strategy is:

A)A
B)B
C)C
D)D
E)E

Question 54

What is the expected annual profit for the bus that he will decide to purchase using Bayes' decision rule?

A)$15,000
B)$61,000
C)$69,000
D)$72,000
E)$87,000

Question 55

The expected value of perfect information is:

A)4 5
B)9
C)40 5
D)49 5
E)60

Question 56

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production.She feels that script #1 has a 70% chance of earning $100 million over the long run,but a 30% chance of losing $20 million.If this movie is successful,then a sequel could also be produced,with an 80% chance of earning $50 million,but a 20% chance of losing $10 million.On the other hand,she feels that script #2 has a 60 % chance of earning $120 million,but a 40% chance of losing $30 million.If successful,its sequel would have a 50% chance of earning $80 million and a 50% chance of losing $40 million.As with the first script,if the original movie is a "flop",then no sequel would be produced.
What is the expected payoff from selecting script #1?

A)$150 million
B)$90 6 million
C)$84 million
D)$72 million
E)$60 million

Question 57

The Bayes' decision rule strategy is:

A)small
B)medium
C)medium large
D)large
E)extra large

Question 58

The expected value of perfect information is:

A)-28
B)0
C)10 5
D)19
E)23

Question 59

The maximum likelihood strategy is:

A)small
B)medium
C)medium large
D)large
E)extra large

Question 60

The construction manager for ABC Construction must decide whether to build single family homes,apartments,or condominiums.he estimates annual profits (in $000)will vary with the population trend as follows:

If he uses the maximum likelihood criterion,which kind of dwellings will he decide to build?

A)Single family
B)Apartments
C)Condos
D)Either single family or apartments
E)Either apartments or condos

Question 61

Given that the research is done,what is the expected payoff using Bayes' decision rule?

A)-82
B)-44
C)0
D)29
E)40

Question 62

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production.She feels that script #1 has a 70% chance of earning $100 million over the long run,but a 30% chance of losing $20 million.If this movie is successful,then a sequel could also be produced,with an 80% chance of earning $50 million,but a 20% chance of losing $10 million.On the other hand,she feels that script #2 has a 60 % chance of earning $120 million,but a 40% chance of losing $30 million.If successful,its sequel would have a 50% chance of earning $80 million and a 50% chance of losing $40 million.As with the first script,if the original movie is a "flop",then no sequel would be produced.
What is the expected payoff from selecting script #2?

A)$150 million
B)$90 6 million
C)$84 million
D)$72 million
E)$60 million

Question 63

There is an option of paying $100 to have research done to better predict which state of nature will occur.When the true state of nature is S1,the research will accurately predict S1 60% of the time.When the true state of nature is S2,the research will accurately predict S2 80% of the time.
Given that the research is done,what is the joint probability that the state of nature is S2 and the research predicts S2?

A)0 08
B)0 16
C)0 24
D)0 32
E)0 36

Question 64

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production.She feels that script #1 has a 70% chance of earning $100 million over the long run,but a 30% chance of losing $20 million.If this movie is successful,then a sequel could also be produced,with an 80% chance of earning $50 million,but a 20% chance of losing $10 million.On the other hand,she feels that script #2 has a 60 % chance of earning $120 million,but a 40% chance of losing $30 million.If successful,its sequel would have a 50% chance of earning $80 million and a 50% chance of losing $40 million.As with the first script,if the original movie is a "flop",then no sequel would be produced.
What is the expected payoff for the optimum decision alternative?

A)$150 million
B)$90 6 million
C)$84 million
D)$72 million
E)$60 million

Question 65

Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book they have a 50% chance of placing it with a major publisher where it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80% chance of placing it with a smaller publisher,with sales of 30,000 copies.On the other hand if they write a statistics book,they feel they have a 40% chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50% chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies.
What is the expected payoff for the optimum decision alternative?

A)50,000 copies
B)40,000 copies
C)32,000 copies
D)30,500 copies
E)10,500 copies

Question 66

Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book they have a 50% chance of placing it with a major publisher where it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80% chance of placing it with a smaller publisher,with sales of 30,000 copies.On the other hand if they write a statistics book,they feel they have a 40% chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50% chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies.
What is the probability that the economics book would wind up being placed with a smaller publisher?

A)0 8
B)0 5
C)0 4
D)0 2
E)0 1

Question 67

What is the posterior probability of S2 given that the research predicts S2?

A)0 18
B)0 44
C)0 57
D)0 65
E)0 82

Question 68

Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book they have a 50% chance of placing it with a major publisher where it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80% chance of placing it with a smaller publisher,with sales of 30,000 copies.On the other hand if they write a statistics book,they feel they have a 40% chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50% chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies.
What is the expected payoff for the decision to write the economics book?

A)50,000 copies
B)40,000 copies
C)32,000 copies
D)30,500 copies
E)10,500 copies

Question 69

What is the unconditional probability that the research predicts S1?

A)0 32
B)0 4
C)0 44
D)0 56
E)0 6

Question 70

There is an option of paying $100 to have research done to better predict which state of nature will occur.When the true state of nature is S1,the research will accurately predict S1 60% of the time.When the true state of nature is S2,the research will accurately predict S2 80% of the time.
Given that the research is done,what is the joint probability that the state of nature is S2 and the research predicts S1?

A)0 08
B)0 16
C)0 24
D)0 32
E)0 36

Question 71

There is an option of paying $100 to have research done to better predict which state of nature will occur.When the true state of nature is S1,the research will accurately predict S1 60% of the time.When the true state of nature is S2,the research will accurately predict S2 80% of the time.
What is the expected value of perfect information?

A)40
B)45
C)75
D)85
E)100

Question 72

There is an option of paying $100 to have research done to better predict which state of nature will occur.When the true state of nature is S1,the research will accurately predict S1 60% of the time.When the true state of nature is S2,the research will accurately predict S2 80% of the time.
Given that the research is not done,what is the expected payoff using Bayes' decision rule?

A)0
B)29
C)40
D)75
E)100

Question 73

Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book they have a 50% chance of placing it with a major publisher where it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80% chance of placing it with a smaller publisher,with sales of 30,000 copies.On the other hand if they write a statistics book,they feel they have a 40% chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50% chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies.
What is the probability that the statistics book would wind up being placed with a smaller publisher?

A)0 6
B)0 5
C)0 4
D)0 3
E)0

Question 74

What is the unconditional probability that the research predicts S2?

A)0 32
B)0 4
C)0 44
D)0 56
E)0 6

Question 75

What is the posterior probability of S1 given that the research predicts S1?

A)0 18
B)0 44
C)0 57
D)0 65
E)0 82

Question 76

There is an option of paying $100 to have research done to better predict which state of nature will occur.When the true state of nature is S1,the research will accurately predict S1 60% of the time.When the true state of nature is S2,the research will accurately predict S2 80% of the time.
Given that the research is done,what is the joint probability that the state of nature is S1 and the research predicts S2?

A)0 08
B)0 16
C)0 24
D)0 32
E)0 36

Question 77

There is an option of paying $100 to have research done to better predict which state of nature will occur.When the true state of nature is S1,the research will accurately predict S1 60% of the time.When the true state of nature is S2,the research will accurately predict S2 80% of the time.
Given that the research is done,what is the joint probability that the state of nature is S1 and the research predicts S1?

A)0 08
B)0 16
C)0 24
D)0 32
E)0 36

Question 78

Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book they have a 50% chance of placing it with a major publisher where it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80% chance of placing it with a smaller publisher,with sales of 30,000 copies.On the other hand if they write a statistics book,they feel they have a 40% chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50% chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies.
What is the expected payoff for the decision to write the statistics book?

A)50,000 copies
B)40,000 copies
C)32,000 copies
D)30,500 copies
E)10,500 copies