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Exam 22: Decision-Making Tools

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Question 51

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The expected value with perfect information assumes that all states of nature are equally likely.

A) True
B) False

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Question 52

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The expected value of perfect information (EVPI) is the:

A) payoff for a decision made under perfect information.
B) payoff under minimum risk.
C) average expected payoff.
D) difference between the payoff under perfect information and the payoff under risk.
E) greater of EVwPI and Maximum EMV.

F) A) and B)
G) B) and E)

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Question 53

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When solving decision trees,what phrase represents the act of dropping an alternative from consideration because it is less favorable than another available option?

In a decision tree,a square symbol represents a state of nature node.

________ is the difference between the payoff under perfect information and the payoff under risk.

The following decision tree has how many state of nature nodes?

The square symbol used in drawing a decision trees represents a(n)________ node.

Explain the symbols used in decision tree analysis.

What is the EMV for Option 2 in the following decision table?

The EMV of a decision with three states of nature is $33,000.If the profit/value under the states of nature A,B,and C is $10,000,$20,000,and $50,000,respectively,and states B and C have equal probabilities,determine the likelihood of state of nature A.

Miles is considering buying a new pickup truck for his lawn service firm.The economy in town seems to be growing,and he is wondering whether he should opt for a subcompact,compact,or full-size pickup truck.The smaller truck would have better fuel economy,but would sacrifice capacity and some durability.A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year,a 20% chance of higher gas prices,and a 50% chance that gas prices will stay roughly unchanged.Based on this information,Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. Calculate the expected monetary value for each decision alternative.Which decision yields the highest EMV?

In the context of decision-making,define a state of nature.

The maximax criterion of decision making requires that all decision alternatives have an equal probability of occurrence.

An example of a conditional value would be the payoff from selecting a particular alternative when a particular state of nature occurs.

An operations manager's staff has compiled the information below for four manufacturing alternatives (A,B,C,and D)that vary by production technology and the capacity of the machinery.All choices enable the same level of total production and have the same lifetime.The four states of nature represent four levels of consumer acceptance of the firm's products.Values in the table are net present value of future profits in millions of dollars. a.Assuming a maximax strategy,which alternative would be chosen? b.If maximin were used,which would be chosen? c.If the states of nature were equally likely,which alternative should be chosen?

The expected monetary value of a decision alternative is the sum of all possible payoffs from the alternative,each weighted by the probability of that payoff occurring.

In terms of decision theory,an occurrence or situation over which the decision maker has no control is called a(n) :