Deck 19: Appendix: Decision Analysis

Question 1

The decision criterion, for a one-time decision without event probabilities, which is neither aggressive nor conservative, is known as _____.

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

Answer 1

C

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Which of the following statements is TRUE of the expected-value approach to selecting decision alternatives?

A) It mostly applies to one-time decisions.
B) It knows the state of nature in advance.
C) It is best suited for repeated decisions.
D) It is independent of probability estimates for events.

Question 5

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

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

Question 6

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

A) There is no sequence of decisions.
B) Little or no data is available.
C) Some data are very expensive.
D) Some data are time-consuming to obtain.

Question 7

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

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

Question 8

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

Question 9

Which of the following is NOT a similarity between the elements of a decision problem and a decision tree?

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

Question 10

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

Question 11

Decision problems can be depicted graphically using the expected-value approach.

Question 12

Decision analysis situations often have multiple objectives.

Question 13

Which of the following is NOT a characteristic of management decisions for which decision analysis techniques apply?

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

Question 14

Irrespective of its quality, the expected value of perfect information represents the maximum amount a company should be willing to pay for any information about events.

Question 15

With an unstable economy, it is difficult to predict actual demand for a product.

Question 16

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

Question 17

_____ 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 18

The minimax-regret approach to one-time decisions without event probabilities is neither aggressive nor conservative.

Question 19

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

Question 20

For decisions that are repeated over and over, managers can choose decisions based on the expected payoff that might occur.

Question 21

Which of the following statements is TRUE of expected value of perfect information (EVPI)?

A) EVPI mostly applies to situations that require one-time decisions.
B) EVPI is a numerical value associated with a decision coupled with some event.
C) EVPI is calculated by adding the expected payoff under perfect information to the expected payoff of the optimal decision without perfect information.
D) EVPI can be computed by determining the best decision and payoff if each event occurs.

Question 22

For _____, managers must take into account the risk associated with making the wrong decision.

A) recurrent payoffs
B) expected payoffs
C) one-time decisions
D) repeated decisions

Question 23

Differentiate between uncertainty and risk.

Question 24

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

Question 25

Which of the following statements is TRUE of a decision tree?

A) The number at each endpoint of a decision tree represents the probability associated with a particular chain of events.
B) A decision tree cannot be used for complex business decisions.
C) In a decision tree, event nodes are represented by squares, while decision nodes are represented by circles.
D) Expected value calculations can be made directly on a decision tree to arrive at the best decision strategy.

Question 26

Describe how the following criteria are applied to a decision problem in which the payoff is cost.
a.Minimin
b.Minimax
c.Minimax regret

Question 27

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 matrix

Question 28

Explain the concept of expected value of perfect information (EVPI). How does it help a decision maker?

Question 29

Elizabeth, a decision maker has decided to expand her operations and become more efficient. She uses 3 decision variables-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 30

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

Question 31

List the four elements of a decision problem.

Question 32

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

Question 33

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 34

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

Question 35

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. Which decision variable would be selected using minimax?
c. Which decision variable would be selected using minimax-regret 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 selected using the expected value criterion?

Question 36

Explain the structure and purpose of a decision tree.

Question 37

Jumbo James sells hotdogs out of a cart for $3.00 each. The cost to purchase and prepare the hotdog is $1.15 each. James 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 hotdogs. On any weekday, the demand for hotdogs and the probability of selling them is estimated as follows:

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

Question 38

In a decision tree, event nodes are denoted by _____.

A) rectangles
B) ovals
C) squares
D) circles

Question 39

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 selected using maximax?
b. Which decision variable would be selected using maximin?
c. Which decision variable would be selected using minimax-regret 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 selected using the expected value criterion?

Question 40

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

Question 41

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 42

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 stagnant. The returns are estimated to be $5 million if it is robust, $3 million if it is stable, and $1 million if it is stagnant.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 should 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 43

A major retail clothing store is considering whether to open a new store on the other side of town or wait for one year and then open the store. In the meantime, they have paid $10,000 for 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 (EV) of opening the store now?
b. Using decision tree analysis, what is the expected value (EV) of waiting one year to open the store?
c. What should the company do and what is the expected value (EV) of that decision?

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