Deck 19: Decision Analysis

Question 1

A risk-taker decision maker will bail out of risky scenario only if the compensation to bail out is more than the expected monetary payoff from the risky scenario.

Answer 1

True

Question 2

In a decision analysis problem,variables (such as investing in common stocks or corporate bonds)which are under the decision maker's control are called decision alternatives.

Answer 2

True

Question 3

In a decision-making scenario,if it is not known which of the states of nature will occur and further if the probabilities of occurrence of the states are also unknown the scenario is called decision-making under double risk.

Answer 3

False

Question 4

A risk-avoider decision maker will bail out of risky scenario only if the compensation to bail out is more than the expected monetary payoff from the risky scenario.

Question 5

In decision-making under risk,the expected monetary value without information is the largest of the expected monetary values for the various decision alternatives.

Question 6

In a decision-making scenario,if it is not known which of the states of nature will occur but the probabilities of occurrence of the states are known the scenario is called decision-making under risk.

Question 7

In a decision-making under uncertainty scenario using the strategy of minmax regret,all the entries in the opportunity loss table must be zero or positive.

Question 8

In decision-making under risk,the expected monetary payoff of perfect information is the weighted average of the best payoff for each state of nature (using the probability of the state of nature as the weight).

Question 9

In a decision-making scenario,if the decision maker knows which state of nature will occur,the scenario is called decision-making under certainty.

Question 10

In a decision analysis problem,variables (such as benefits or rewards that result from investments in common stocks or corporate bonds and from a new product launch)which result from selecting a particular decision alternative are called posterior probabilities.

Question 11

In a decision-making under uncertainty scenario,the best decision alternative based on the strategy of minmax regret will always have zero regret.

Question 12

In a decision-making under risk scenario,the expected monetary value of a decision alternative is the weighted average (using the probability of each state of nature as the weight)of the payoffs to the decision alternative in each state of the nature.

Question 13

In a decision-making under uncertainty scenario,the decision maker chooses the decision alternative that has the minimum expected (i.e.,probability-weighted)payoff among all the available alternatives.

Question 14

The value of perfect information is the difference between the monetary payoff with perfect information and the expected monetary payoff with no information.

Question 15

The expected monetary payoff of perfect information is the value of perfect information.

Question 16

The concept of utility can be helpful to apply decision analysis techniques to situations which do not lend themselves to expected monetary value analysis.

Question 17

The value of sample information is the ratio of the expected monetary value with information to the expected monetary value without information.

Question 18

In a decision-making under uncertainty scenario,the decision maker attempts to develop a strategy based on payoffs since virtually no information is available about which state of nature will occur.

Question 19

In a decision-making under risk scenario,the expected monetary value of a decision alternative is the arithmetic average of the payoffs to the decision alternative in each state of the nature.

Question 20

In a decision analysis problem,variables (such as general macroeconomic conditions)which are not under the decision maker's control are called prior probabilities.

Question 21

Consider the following decision table with rewards in $ millions. Using the Hurwicz criterion with alpha = 0.2,the appropriate choice would be ________.

A) d₁
B) d₂
C) d₃
D) d₄
E) d₅

Question 22

Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.For Dan's decision problem,the variable "drill the well" is one of the ___________.

A) payoffs
B) decision alternatives
C) states of nature
D) revised probabilities
E) prior probabilities

Question 23

In decision-making under uncertainty,the approach that considers only the best and the worst payoffs for each decision alternative is the __________.

A) maximin criterion
B) maximax criterion
C) Hurwicz criterion
D) minimax regret strategy
E) maximin regret strategy

Question 24

Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.The probability of the state of nature "oil in the tract" is unknown.If Dan is an optimist,he would choose the _____________.

A) maximin criterion
B) maximax criterion
C) Hurwicz criterion
D) minimax regret strategy
E) maximin regret strategy

Question 25

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant. He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. If Trey uses the maximax criterion,the appropriate alternative would be: _____________.

A) Lease New Equipment
B) Purchase New Equipment
C) Add Third Shift
D) Do Nothing
E) Do everything

Question 26

In a decision analysis problem,variables (such as investing in common stocks or corporate bonds)which are under the decision maker's control are called _________.

A) payoffs
B) decision alternatives
C) states of nature
D) revised probabilities
E) prior probabilities

Question 27

Consider the following decision table with rewards in $ millions. Using the maximax criterion,the appropriate choice would be __________.

A) d₁
B) d₂
C) d₃
D) d₄
E) d₅

Question 28

The value of sample information is the difference between the expected monetary value with information to the expected monetary value without information.

Question 29

Consider the following decision table with rewards in $ millions. Using the maximin criterion,the appropriate choice would be __________.

A) d₁
B) d₂
C) d₃
D) d₄
E) d₅

Question 30

In decision-making under uncertainty,a pessimistic approach is the __________.

A) maximin criterion
B) maximax criterion
C) Hurwicz criterion
D) minimax regret strategy
E) maximin regret strategy

Question 31

Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.For Dan's decision problem,the variable "oil in the tract" is one of the ___________.

A) payoffs
B) decision alternatives
C) states of nature
D) revised probabilities
E) prior probabilities

Question 32

Consider the following decision table with rewards in $ millions. Using the Hurwicz criterion with alpha = 0.1,the appropriate choice would be ________.

A) d₁
B) d₂
C) d₃
D) d₄
E) d₅

Question 33

Consider the following decision table with rewards in $ millions. The opportunity loss for the combination "S₂" and "d₁" is ________.

A) 9
B) 5
C) 3
D) 0
E) -1

Question 34

Consider the following decision table with rewards in $ millions. The opportunity loss for the combination "S₃" and "d₁" is ________.

A) 9
B) 5
C) 3
D) 0
E) -1

Question 35

Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.The probability of the state of nature "oil in the tract" is unknown.If Dan is a pessimist,he would choose the ____________.

A) maximin criterion
B) maximax criterion
C) Hurwicz criterion
D) minimax regret strategy
E) maximin regret strategy

Question 36

Dianna Ivy is evaluating a plan to expand the production facilities of International Compressors Company which manufactures natural gas compressors. Dianna feels that the price of coal is a significant factor in her decision,but she cannot control it. For her decision,the different prices of coal represent the _____________.

A) payoffs
B) decision alternatives
C) states of nature
D) revised probabilities
E) prior probabilities

Question 37

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. If Trey uses the Hurwicz criterion with alpha = 0.1,the appropriate alternative would be: _____________.

A) Lease New Equipment
B) Purchase New Equipment
C) Add Third Shift
D) Do Nothing
E) Do everything

Question 38

In decision-making under uncertainty,an optimistic approach is the __________.

A) maximin criterion
B) maximax criterion
C) Hurwicz criterion
D) minimax regret strategy
E) maximin regret strategy

Question 39

Dan Hein owns the mineral and drilling rights to a 1,000 acre tract of land. If he drills a well and does not strike oil his net loss will be $50,000,but if he drills a well and strikes oil his net gain will be $100,000.If he does not drill,his loss is the cost of the mineral and drilling rights,which amount to $1000.For Dan's decision problem,the variable "net loss of $50,000" is one of the ___________.

A) payoffs
B) decision alternatives
C) states of nature
D) revised probabilities
E) prior probabilities

Question 40

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant. He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. If Trey uses the maximin criterion,the appropriate alternative would be: _____________.

A) Lease New Equipment
B) Purchase New Equipment
C) Add Third Shift
D) Do Nothing
E) Do everything

Question 41

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities.

A) $30,000
B) $63,000
C) $78,000
D) $81,000
E) $100,000

Question 42

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste. She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities. The EMV of introducing the new package in the "National" market is ________.

A) $50,000
B) $70,000
C) $90,000
D) $260,000
E) $300,000

Question 43

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. If Ray uses the Hurwicz criterion with alpha = 0.5,the appropriate choice is ______.

A) T-Bills
B) Stocks
C) Bonds
D) Mixture
E) None

Question 44

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. The opportunity loss for the combination "Purchase New Equipment" and "Low" is ____.

A) 0.5
B) 1.5
C) 2.5
D) 3.0
E) 3.5

Question 45

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities.

A) T-Bills
B) Stocks
C) Bonds
D) Mixture
E) Bank CD's

Question 46

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. For the 'Stocks' and 'Bonds' choices,the indifference value of Hurwicz's alpha is ____.

A) 0.82
B) 0.71
C) 0.65
D) 0.33
E) 0.50

Question 47

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste. She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities. The EMV of introducing the new package in the "Northeast Only" market is ________.

A) $50,000
B) $70,000
C) $90,000
D) $260,000
E) $300,000

Question 48

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. If Trey uses the Hurwicz criterion with alpha = 0.4,the appropriate alternative would be: _____________.

A) Lease New Equipment
B) Purchase New Equipment
C) Add Third Shift
D) Do Nothing
E) Do everything

Question 49

In decision-making under risk,the expected monetary value without information is ____________.

A) the weighted average of the best payoff for each state of nature
B) the largest of the EMVs for the different decision alternatives
C) never smaller than the expected monetary payoff with perfect information
D) the average of the EMVs
E) half the expected monetary value with information

Question 50

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. If Ray uses the Hurwicz criterion with alpha = 0.9,the appropriate choice is ______.

A) T-Bills
B) Stocks
C) Bonds
D) Mixture
E) None

Question 51

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. For the combination of 'Bear' and 'Mixture',the opportunity loss is ______.

A) 0
B) 5
C) 13
D) 33
E) -10

Question 52

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities.

A) $30,000
B) $63,000
C) $78,000
D) $81,000
E) $100,000

Question 53

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. If Ray uses the maximin criterion,the appropriate choice would be ________.

A) T-Bills
B) Stocks
C) Bonds
D) Mixture
E) None

Question 54

Trey Leeman,Operations Manager at National Consumers,Inc.(NCI),is evaluating alternatives for increasing capacity at NCI's Fountain Hill plant.He has identified four alternatives,and has constructed the following payoff table which shows payoffs (in $1,000,000's)for the three possible levels of market demand. The opportunity loss for the combination "Purchase New Equipment" and "High" is ___.

A) 0.0
B) 0.5
C) 2.5
D) 3.0
E) 3.5

Question 55

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. For the combination of 'T-Bills' and 'Neutral',the opportunity loss is _________.

A) 0
B) 5
C) 7
D) 8
E) -10

Question 56

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste. She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities. If Melissa uses the EMV criterion,the appropriate choice would be: ________.

A) Northeast Only
B) Southeast Only
C) National
D) None (don't introduce the new package)

Question 57

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. If Ray uses the Hurwicz criterion with alpha = 0.1,the appropriate choice is ______.

A) T-Bills
B) Stocks
C) Bonds
D) Mixture
E) None

Question 58

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities.

A) $30,000
B) $63,000
C) $78,000
D) $81,000
E) $100,000

Question 59

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. For the 'T-Bills' and 'Bonds' choices,the indifference value of Hurwicz's alpha is _____.

A) 0.8267
B) 0.7134
C) 0.6555
D) 0.3333
E) 0.5000

Question 60

Ray Crofford is evaluating investment alternatives to invest $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following payoff table which shows expected profits (in $10,000's)for various market conditions. If Ray uses the maximax criterion,the appropriate choice would be ________.

A) T-Bills
B) Stocks
C) Bonds
D) Mixture
E) None

Question 61

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. If the advisor predicts a Bull market the EMV of the Bonds alternative,using revised probabilities,is ________.

A) $85,240
B) $25,710
C) $108,450
D) $75,480

Question 62

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. If the advisor predicts a Bear market the EMV of the Stocks alternative,using revised probabilities,is ________.

A) $132,300
B) -$73,900
C) $127,600
D) -$99,800
E) $100,000

Question 63

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. If the advisor predicts a Bear market the EMV of the Bonds alternative,using revised probabilities,is ________.

A) $36,600
B) $24,600
C) $56,800
D) $48,200
E) $45,800

Question 64

Frank Forgione has the right to enter a contest where he has a 50% chance of winning $50,000 and a 50% chance of losing $0. It costs Frank nothing to enter the contest.If he is willing to give up his right to enter the contest for a sure payment of $10,000,he is ___.

A) a risk avoider
B) an optimist
C) a risk taker
D) risk neutral (an EMV'er)
E) a gambler

Question 65

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste. She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities. The expected monetary payoff with perfect information is ________.

A) $570,000
B) $680,000
C) $760,000
D) $830,000
E) $980,000

Question 66

Melissa Rossi,Product Manager at National Consumers,Inc.(NCI),is evaluating alternatives for introducing a new package for toothpaste. She has identified four alternative markets,and has constructed the following table which shows NCI's rewards (in $1,000,000's)for various levels of acceptance by the markets and their probabilities. The expected value of perfect information is ________.

A) $420,000
B) $570,000
C) $660,000
D) $720,000
E) $890,000

Question 67

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. If the advisor predicts a Bear market the revised probability of a Bear market,P (S₂|F₂),is ________.

A) 0.524
B) 0.636
C) 0.784
D) 0.812
E) 0.000

Question 68

The expected monetary value without information is $60,and the expected monetary payoff with perfect information is $120.The expected value of perfect information is __.

A) $60
B) $2
C) $180
D) $0.50
E) $120

Question 69

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities. The expected value of perfect information is ________.

A) $57,000
B) $63,000
C) $79,000
D) $82,000
E) $87,000

Question 70

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. The EMV of this investment opportunity with the advisor's prediction is ________.

A) $167,379
B) $174,200
C) $153,900
D) $136,700
E) $140,011

Question 71

Which of the following choices is not true about decision theory?

A) Decision alternatives for one person can be states of nature for another.
B) Payoffs are always positive or zero.
C) If you play a card game at a casino, the cards you are dealt are states of nature.
D) If you decide to take a MOOC (massive open online course), how much you learn is a payoff.
E) In a two-person interaction, it is possible that the sum of the two payoffs is positive.

Question 72

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. The probability that the advisor predicts a Bull market,P (F₁),is ________.

A) 0.78
B) 0.894
C) 0.953
D) 0.923
E) 1.000

Question 73

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified four alternatives and constructed the following table which shows expected profits (in $10,000's)for various market conditions and their probabilities.

A) $128,000
B) $137,000
C) $144,000
D) $151,000
E) $127,000

Question 74

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. The probability that the advisor predicts a Bull market and the Bull market is the actual condition p(F₁ᴖS₁₎ is ________.

A) 0.78
B) 0.9
C) 0.953
D) 0.923
E) 0.72

Question 75

A particular electronic component is produced at two plants for an electronics manufacturer.Plant A produces 70% of the components used and the remainder are produced by plant B.The probability that a component is defective is 0.02 if it is produced at plant A and 0.01 if it is produced at plant B. If the component is defective the revised probability it is produced at plant B,P (B|D),is ________

A) 0.3
B) 0.01
C) 0.003
D) 0.176
E) 0.017

Question 76

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. If the advisor predicts a Bull market the revised probability of a Bull market,P (S₁|F₁),is ________.

A) 0.877
B) 0.894
C) 0.953
D) 0.923
E) 1.000

Question 77

The expected monetary value without information is $2,500,and the expected monetary payoff with perfect information is $5,000. The expected value of perfect information is ____________.

A) $7,500
B) $2,500
C) $1,500
D) $2,000
E) $1,250

Question 78

A particular electronic component is produced at two plants for an electronics manufacturer.Plant A produces 70% of the components used and the remainder are produced by plant B.The probability that a component is defective is 0.02 if it is produced at plant A and 0.01 if it is produced at plant B. The probability that the component is defective is ______

A) 0.3
B) 0.01
C) 0.003
D) 0.176
E) 0.017

Question 79

Frank Forgione has the right to enter a contest where he has a 50% chance of winning $50,000 and a 50% chance of losing $0. It costs Frank nothing to enter the contest.If he is willing to give up his right to enter the contest for a sure payment of $25,000,he is ___.

A) a risk avoider
B) an optimist
C) a risk taker
D) risk neutral (an EMV'er)
E) a gambler

Question 80

Ray Crofford is evaluating investment alternatives for the $100,000 which he inherited from his grandfather. His investment advisor has identified two alternatives and constructed the following tables which show (1)expected profits (in $10,000's)for various market conditions and their probabilities,and (2)the advisor's track record on predicting Bull and Bear markets. If the advisor predicts a Bull market the EMV of the Stocks alternative,using revised probabilities,is ________.

A) $168,900
B) $207,650
C) $157,300
D) $306,000
E) $134,650