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Exam 3: Decision Analysis

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Question 31

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Briefly describe decision making under risk.

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There are several possible out...

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Question 32

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It is sometimes said that "Those who gamble the most are the ones who can least afford to lose." These people gamble because

A) the EMV is positive.
B) the EMV is negative.
C) the gambler has no family to consider if he/she dies.
D) there is utility other than monetary to consider.
E) None of the above

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Question 33

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The nodes on decision trees represent either decisions or states of nature.

A market research survey is available for $10,000. Using a decision tree analysis, it is found that the expected monetary value with the survey is $75,000. The expected monetary value with no survey is $62,000. What is the expected value of sample information?

The following is an opportunity loss table. What decision should be made based on the minimax regret criterion?

The decision theory processes of maximizing expected monetary value (EMV) and minimizing expected opportunity loss (EOL) should lead us to choose the same alternatives.

A pessimistic decision making criterion is

In Bayesian analysis, conditional probabilities are also known as which of the following?

Pessimistic decision makers tend to ________.

The difference in decision making under risk and decision making under uncertainty is that under risk, we think we know the probabilities of the states of nature, while under uncertainty we do not know the probabilities of the states of nature.

Briefly describe decision making under certainty.

Expected monetary value (EMV) is the average or expected monetary outcome of a decision if it can be repeated a large number of times.

David N. Goliath is planning to open a sporting goods store. However, the initial investment is $120,000. He currently has this money in a certificate of deposit earning 10 percent. He may leave it there if he decides not to open the store. If he opens the store and it is successful he will generate a profit of $50,000. If it is not successful, he will lose $90,000. What would the probability of a successful store have to be for David to prefer this to investing in a CD?

Optimistic decision makers tend to discount favorable outcomes.

The optimistic decision criterion is the criterion of ________.

Utility values typically range from -1 to +1.

Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of $50,000. If demand is low, he will lose $10,000. If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 if demand is low. He also has the option of not opening either. He believes that there is a 50 percent chance that demand will be high. Mark can purchase a market research study. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable. Should Mark use the study? Why? What is the maximum amount Mark should be willing to pay for this study? What is the maximum amount he should pay for any study?

List the five major decision criteria used when making decisions under uncertainty.

The following is a payoff table giving profits for various situations. What decision would an optimist make?

Describe the structure of a payoff table.