05S Chapter - Supplement: Decision Theory
Chapter 05S Supplement: Decision Theory
True / False Questions 1. Decision trees, with their predetermined analysis of a situation, are really not useful in making health care decisions since every person is unique. FALSE
AACSB: RT Difficulty: Easy TLO: 1 Taxonomy: Synthesis
2. Bounded rationality refers to the limits imposed on decision-making because of costs, human abilities, time, technology, and/or availability of information. TRUE
Difficulty: Easy TLO: 1 Taxonomy: Knowledge
3. In reaching a decision, the alternative with the lowest cost should be ranked #1. FALSE
Difficulty: Medium TLO: 1 Taxonomy: Knowledge
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Chapter 05S - Supplement: Decision Theory
4. The expected monetary value approach is most appropriate when the decision-maker is risk-neutral. TRUE
Difficulty: Medium TLO: 3 Taxonomy: Knowledge
5. The value of perfect information is inversely related to losses predicted. FALSE
Difficulty: Hard TLO: 5 Taxonomy: Knowledge
6. Expected monetary value gives the long-run average payoff if a large number of identical decisions could be made. TRUE
Difficulty: Medium TLO: 3 Taxonomy: Knowledge
7. Among decision environments, risk implies that certain parameters have probabilistic outcomes. TRUE
Difficulty: Medium TLO: 1 Taxonomy: Knowledge
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Chapter 05S - Supplement: Decision Theory
8. Among decision environments, uncertainty implies that states of nature have wide ranging probabilities associated with them. FALSE
Difficulty: Medium TLO: 1 Taxonomy: Knowledge
9. In decision theory, states of nature refer to possible future conditions. TRUE
Difficulty: Easy TLO: 1 Taxonomy: Knowledge
10. The maximin approach involves choosing the alternative with the highest payoff. FALSE
Difficulty: Hard TLO: 2 Taxonomy: Knowledge
11. The maximin approach involves choosing the alternative that has the "best worst" payoff. TRUE
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
12. The Laplace criterion treats states of nature as being equally likely. TRUE
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
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Chapter 05S - Supplement: Decision Theory
13. The maximax approach is a pessimistic strategy. FALSE
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
14. A weakness of the maximin approach is that it loses some information. TRUE
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
15. The expected value approach applies to decision-making under uncertainty. FALSE
Difficulty: Medium TLO: 3 Taxonomy: Knowledge
16. The expected value approach is used for decision-making under risk. TRUE
Difficulty: Easy TLO: 3 Taxonomy: Knowledge
17. The EVPI indicates an upper limit on the amount a decision-maker should be willing to spend to obtain additional information. TRUE
AACSB: RT Difficulty: Hard TLO: 3 Taxonomy: Synthesis
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Chapter 05S - Supplement: Decision Theory
18. Graphical sensitivity analysis is limited to cases with no more than two alternatives. FALSE
Difficulty: Hard TLO: 6 Taxonomy: Knowledge
19. Graphical sensitivity analysis is used for decision-making under risk. TRUE
Difficulty: Medium TLO: 6 Taxonomy: Knowledge
20. An advantage of decision trees compared to payoff tables is that they permit us to analyze situations involving sequential decisions. TRUE
Difficulty: Medium TLO: 4 Taxonomy: Knowledge
Multiple Choice Questions 21. The term sub-optimization is best described as the: A. result of individual departments making the best decisions for their own areas B. limitations on decision-making caused by costs and time C. result of failure to adhere to the steps in the decision process D. result of ignoring symptoms of the problem E. none of the above
Difficulty: Medium TLO: 1 Taxonomy: Knowledge
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Chapter 05S - Supplement: Decision Theory
22. Which phrase best describes the term bounded rationality? A. thinking a problem through clearly before acting B. taking care not to exhaust limited resources C. the result of departmentalized decision making D. limits imposed on decision making by costs, time, and technology E. the use of extremely structured steps in the decision making process
Difficulty: Hard TLO: 1 Taxonomy: Knowledge
23. Testing how a problem solution reacts to changes in one or more of the model parameters is called: A. simulation B. sensitivity analysis C. priority recognition D. analysis of variance E. decision analysis
Difficulty: Hard TLO: 6 Taxonomy: Knowledge
24. Sensitivity analysis is required because ________. A. payoffs and probabilities are estimates B. most decision will affect employees C. expected payoffs are sensitive to the time value of money D. it's the second step in the decision model E. with the passage of time, small decisions get bigger
AACSB: RT Difficulty: Medium TLO: 6 Taxonomy: Knowledge
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Chapter 05S - Supplement: Decision Theory
25. A tabular presentation that shows the outcome for each decision alternative under the various possible states of nature is called a/an: A. payoff table B. feasible region C. LaPlace table D. decision tree E. payback period matrix
Difficulty: Medium TLO: 1 Taxonomy: Knowledge
26. Which of the following characterizes decision-making under uncertainty? A. Decision-makers must rely on probabilities in assessing outcomes. B. The likelihood of possible future events is unknown. C. Relevant parameters have known values. D. Certain parameters have probabilistic outcomes. E. none of the above
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
27. Which of the following is not an approach for decision-making under uncertainty? A. decision trees B. maximin C. maximax D. minimax regret E. Laplace
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
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Chapter 05S - Supplement: Decision Theory
28. Determining the worst payoff for each alternative and choosing the alternative with the "best worst" is the approach called: A. minimin B. maximin C. maximax D. minimax regret E. Laplace
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
29. Determining the average payoff for each alternative and choosing the alternative with the highest average is the approach called: A. minimin B. maximin C. maximax D. minimax regret E. Laplace
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
30. The maximin approach to decision-making refers to: A. minimizing the maximum return B. maximizing the minimum return C. maximizing the minimum expected value D. choosing the alternative with the highest payoff E. choosing the alternative with the minimum payoff
Difficulty: Medium TLO: 2 Taxonomy: Knowledge
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Chapter 05S - Supplement: Decision Theory
31. Which one of these is not used in decision-making under risk? A. EVPI B. EMV C. decision trees D. minimax regret E. All are used for risk situations.
Difficulty: Hard TLO: 3 Taxonomy: Knowledge
32. The term opportunity loss or regret is most closely associated with: A. minimax regret B. maximax C. maximin D. expected monetary value E. Laplace
Difficulty: Hard TLO: 2 Taxonomy: Knowledge
33. The expected monetary value criterion (EMV) is the decision-making approach used with the decision environment of: A. certainty B. risk C. uncertainty D. all of the above E. none of the above
Difficulty: Medium TLO: 3 Taxonomy: Knowledge
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Chapter 05S - Supplement: Decision Theory
34. A decision tree is: A. an algebraic representation of alternatives B. a behavioral representation of alternatives C. a matrix representation of alternatives D. a schematic representation of alternatives E. limited to a maximum of 12 branches
Difficulty: Medium TLO: 4 Taxonomy: Knowledge
35. The difference between expected payoff under certainty and expected payoff under risk is the expected: A. monetary value B. value of perfect information C. net present value D. rate of return E. profit
AACSB: AS Difficulty: Hard TLO: 5 Taxonomy: Application
36. If the minimum expected regret is computed, it indicates to a decision-maker the expected: A. value of perfect information B. payoff under certainty C. monetary value D. payoff under risk E. none of the above
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
37. The term sensitivity analysis is most closely associated with: A. maximax B. maximin C. decision-making under risk D. minimax regret E. Laplace criterion
Difficulty: Hard TLO: 6 Taxonomy: Knowledge
Essay Questions
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Chapter 05S - Supplement: Decision Theory
38. A manager has developed the following payoff table that indicates the profits associated with a set of alternatives under two possible states of nature.
Answer the following questions: (A) If the manager uses maximin as the decision criterion, which of the alternatives would be indicated? (B) If the manager uses minimax regret as the criterion, which alternative would be indicated? (C) Determine the expected value of perfect information if P(S2) = .40. (D) Determine the range of P(S2) for which each alternative would be optimal.
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Chapter 05S - Supplement: Decision Theory
(A) Maximin: Alt. 3 (B) Regret matrix is:
*minimum regret
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Chapter 05S - Supplement: Decision Theory
Therefore, Alternative 1 or 3 would be selected under risk, within EVPI of 2.4 (Min EVPI = Max EMV).
AACSB: AS Difficulty: Medium TLO: 2, 3, 6 Taxonomy: Application
39. A manager's staff has compiled the information below which pertains to four capacity alternatives under four states of nature. Values in the matrix are present value in thousands of dollars.
(A) Assuming a maximax strategy, which alternative would be chosen? (B) If maximin were used, which alternative would be chosen? (C) If states of nature are equally likely and an expected value criterion of maximization is used, which alternative would be chosen?
(A) Maximax is A ($50 is the largest value for any alternative). (B) Maximin is either B or C (Both have the largest minimum values of $30). (C) A: $35; B: $33.75; C: $31.25; D: $27.50. Hence, choose A.
AACSB: AS Difficulty: Medium TLO: 2, 3 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
40. A manager has learned that annual profits from four alternatives being considered for solving a capacity problem are projected to be $15,000 for A, $30,000 for B, $45,000 for C, and $60,000 for D if state of nature 1 occurs; and $60,000 for A, $80,000 for B, $90,000 for C, and $35,000 for D if state of nature 2 occurs. (A) Assuming maximax is used, what alternative would be chosen? (B) Assuming maximin is used, what alternative would be chosen? (C) If P(State of Nature 1) is .40, what alternative has the highest expected monetary value? (D) Determine the range of P(S2) for which each alternative would be optimal.
(A) Maximax is C ($90) (B) Maximin is C ($45) (C) Max EMV is C ($72) (D) Refer to the diagram, above.
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Chapter 05S - Supplement: Decision Theory
AACSB: AS Difficulty: Medium TLO: 2, 3, 6 Taxonomy: Application
41. A manager is quite concerned about the recent deterioration of a section of the roof on a building that houses her firm's computer operations. According to her assistant there are three options which merit consideration: A, B, and C. Moreover, there are three possible future conditions that must be included in the analysis: I, which has a probability of occurrence of .5; II, which has a probability of .3; and III, which has a probability of .2. If condition I materializes, A will cost $12,000, B will cost $20,000, and C will cost $16,000. If condition II materializes, the costs will be $15,000 for A, $18,000 for B, and $14,000 for C. If condition III materializes, the costs will be $10,000 for A, $15,000 for B, and $19,000 for C. (A) Draw a decision tree for this problem. (B) Using expected monetary value, which alternative should be chosen?
Alternative A (expected monetary value = $12.5K) should be chosen.
AACSB: AS Difficulty: Medium TLO: 3, 4 Taxonomy: Application
Multiple Choice Questions
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Chapter 05S - Supplement: Decision Theory
*PV for profits ($000)
42. The maximax strategy would be: A. buy B. lease C. rent D. high E. low
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
43. The maximin strategy would be: A. buy B. lease C. rent D. high E. low
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
44. The minimax regret strategy would be: A. buy B. lease C. rent D. high E. low
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
45. If P(high) is .60, the choice for maximum expected value would be: A. buy B. lease C. rent D. high E. low
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
*PV for profits ($000)
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Chapter 05S - Supplement: Decision Theory
46. The maximax strategy would be: A. small B. medium C. med.-large D. large E. ex-large
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
47. The maximin strategy would be: A. small B. medium C. med.-large D. large E. ex-large
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
48. The minimax regret strategy would be: A. small B. medium C. med.-large D. large E. ex-large
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
49. If yes and no are equally likely, which alternative has the largest expected monetary value? A. small B. medium C. med.-large D. large E. ex-large
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
*PV for profits ($000)
50. The maximax strategy would be: A. A B. B C. C D. D E. E
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
51. The maximin strategy would be: A. A B. B C. C D. D E. E
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
52. The minimax regret strategy would be: A. A B. B C. C D. D E. E
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
53. With equally likely states of nature, the alternative that has the largest expected monetary value is: A. A B. B C. C D. D E. E
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
The new owner of a beauty shop is trying to decide whether to hire one, two, or three beauticians. She estimates that profits next year (in thousands of dollars) will vary with demand for her services and has estimated demand in three categories low, medium and high
54. If she uses the maximax criterion, how many beauticians will she decide to hire? A. one B. two C. three D. either one or two E. either two or three
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
55. If she uses the Laplace criterion, how many beauticians will she decide to hire? A. one B. two C. three D. either one or two E. either two or three
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
56. If she uses the minimax regret criterion, how many beauticians will she decide to hire? A. one B. two C. three D. either one or two E. either two or three
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
57. If she feels the chances of low, medium, and high demand are 50%, 20%, and 30% respectively, what are the expected annual profits for the number of beauticians she will decide to hire? A. $54,000 B. $55,000 C. $70,000 D. $80,000 E. $135,000
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
58. If she feels the chances of low, medium, and high demand are 50%, 20%, and 30% respectively, what is her expected value of perfect information? A. $54,000 B. $55,000 C. $70,000 D. $80,000 E. $135,000
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
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:
59. If he uses the maximin 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
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
60. If he uses the Laplace 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
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
61. If he uses the minimax regret 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
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
62. If he feels the chances of low, moderate, and high demand are 30%, 30%, and 40% respectively, what is the expected annual profit for the bus that he will decide to purchase? A. $15,000 B. $61,000 C. $69,000 D. $72,000 E. $87,000
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
63. If he feels the chances of low, moderate, and high demand are 30%, 30%, and 40% respectively, what is his expected value of perfect information? A. $15,000 B. $61,000 C. $69,000 D. $72,000 E. $87,000
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows:
64. If he uses the maximax criterion, which alternative will he decide to select? A. do nothing B. expand C. build new D. either do nothing or expand E. either expand or build new
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
65. If he uses the Laplace criterion, which alternative will he decide to select? A. do nothing B. expand C. build new D. either do nothing or expand E. either expand or build new
AACSB: Difficulty: AS Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
66. If he uses the minimax regret criterion, which alternative will he decide to select? A. do nothing B. expand C. build new D. either do nothing or expand E. either expand or build new
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
67. If he feels the chances of low, normal, and high precipitation are 30%, 20%, and 50% respectively, what are expected long-run profits for the alternative he will select? A. $140,000 B. $170,000 C. $285,000 D. $305,000 E. $475,000
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
68. If he feels the chances of low, normal, and high precipitation are 30%, 20%, and 50% respectively, what is his expected value of perfect information? A. $140,000 B. $170,000 C. $285,000 D. $305,000 E. $475,000
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
The local operations manager for the Internal Revenue Service must decide whether to hire one, two, or three temporary tax examiners for the upcoming tax season. She estimates that net revenues (in thousands of dollars) will vary with how well taxpayers comply with the new tax code just passed by Congress, as follows:
69. If she uses the maximin criterion, how many new examiners will she decide to hire? A. one B. two C. three D. either one or two E. either two or three
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
70. If she uses the Laplace criterion, how many new examiners will she decide to hire? A. one B. two C. three D. either one or two E. either two or three
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
71. If she uses the minimax regret criterion, how many new examiners will she decide to hire? A. one B. two C. three D. either one or two E. either two or three
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
72. If she feels the chances of low, medium, and high compliance are 20%, 30%, and 50% respectively, what are the expected net revenues for the number of assistants she will decide to hire? A. $26,000 B. $46,000 C. $48,000 D. $50,000 E. $76,000
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
73. If she feels the chances of low, medium, and high compliance are 20%, 30%, and 50% respectively, what is her expected value of perfect information? A. $16,000 B. $26,000 C. $46,000 D. $48,000 E. $50,000
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
The construction manager for Acme Construction, Inc. must decide whether to build singlefamily homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows:
74. If he uses the maximin criterion, which kind of dwellings will he decide to build? A. single family B. apartments C. condominiums D. either single family or apartments E. either apartments or condos
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
75. If he uses the Laplace 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
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
76. If he uses the minimax regret 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
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
77. If he feels the chances of declining, stable, and growing population trends are 40%, 50%, and 10%, respectively, which kind of houses will he decide to build? A. single family B. apartments C. condos D. either single family or apartments E. either apartments or condos
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
78. If he feels the chances of declining, stable, and growing population trends are 40%, 50%, and 10%, respectively, what is his expected value of perfect information? A. $187,000 B. $132,000 C. $123,000 D. $ 65,000 E. $ 55,000
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new retail outlet. She estimates that monthly profits will vary with demand for her cookies as follows:
79. If she uses the maximax criterion, what size outlet will she decide to lease? A. small B. medium C. large D. either small or medium E. either medium or large
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
80. If she uses the maximin criterion, what size outlet will she decide to lease? A. small B. medium C. large D. either small or medium E. either medium or large
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
81. If she uses the Laplace criterion, what size outlet will she decide to lease? A. small B. medium C. large D. either small or medium E. either medium or large
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
82. If she uses the minimax regret criterion, what size outlet will she decide to lease? A. small B. medium C. large D. either small or medium E. either medium or large
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
83. If she feels there is a 30% chance that demand will be high, what are the expected monthly profits for the outlet she will decide to lease? A. $1,600 B. $1,100 C. $1,000 D. $900 E. $500
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
84. If she feels there is a 30% chance that demand will be high, what is her expected payoff under certainty? A. $1,600 B. $1,100 C. $1,000 D. $900 E. $500
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
85. If she feels there is a 30% chance that demand will be high, what is her expected value of perfect information? A. $1,600 B. $1,100 C. $1,000 D. $900 E. $500
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
86. For what range of probability that demand will be high, will she decide to lease the small facility? A. 0 - .25 B. 0 - .33 C. .25 - .5 D. .33 - 1 E. .5 - 1
AACSB: AS Difficulty: Hard TLO: 6 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
87. For what range of probability that demand will be high, will she decide to lease the medium facility? A. 0 - .25 B. 0 - .33 C. .25 - .5 D. .33 - 1 E. .5 - 1
AACSB: AS Difficulty: Hard TLO: 6 Taxonomy: Application
88. For what range of probability that demand will be high, will she decide to lease the large facility? A. 0 - .25 B. 0 - .33 C. .25 - .5 D. .33 - 1 E. .5 - 1
AACSB: AS Difficulty: Hard TLO: 6 Taxonomy: Application
The advertising manager for Roadside Restaurants, Inc. needs to decide whether to spend this month's budget for advertising on print media, television, or a mixture of the two. She estimates that the cost per thousand "hits" (readers or viewers) will vary depending upon the success of the new cable television network she plans to use, as follows:
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Chapter 05S - Supplement: Decision Theory
89. If she uses the maximax criterion, which advertising strategy will she use? A. print B. mixed C. television D. either print or mixed E. either mixed or television
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
90. If she uses the maximin criterion, which advertising strategy will she use? A. print B. mixed C. television D. either print or mixed E. either mixed or television
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
91. If she uses the Laplace criterion, which advertising strategy will she use? A. print B. mixed C. television D. either print or mixed E. either mixed or television
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
92. If she uses the minimax regret criterion, which advertising strategy will she use? A. print B. mixed C. television D. either print or mixed E. either mixed or television
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
93. If she feels that there is a 60% chance that the new cable network will be successful, what is her expected cost (per thousand "hits") for the strategy she will select? A. $ 3.40 B. $ 4.60 C. $ 8.00 D. $ 9.00 E. $10.00
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
94. If she feels that there is a 60% chance that the new cable network will be successful, what is her expected cost (per thousand "hits") under certainty? A. $ 3.40 B. $ 4.60 C. $ 8.00 D. $ 9.00 E. $10.00
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
95. If she feels that there is a 60% chance that the new cable network will be successful, what is her expected value (per thousand "hits") of perfect information? A. $ 3.40 B. $ 4.60 C. $ 8.00 D. $ 9.00 E. $10.00
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
96. For what range of probability that the new cable network will be successful will she select the print media strategy? A. 0 - .4 B. 0 - .55 C. .4 - .7 D. .55 - 1 E. .7 - 1
AACSB: AS Difficulty: Hard TLO: 6 Taxonomy: Application
97. For what range of probability that the new cable network will be successful will she select the mixed media strategy? A. 0 - .4 B. 0 - .55 C. .4 - .7 D. .55 - 1 E. .7 - 1
AACSB: AS Difficulty: Hard TLO: 6 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
98. For what range of probability that the new cable network will be successful will she select the television media strategy? A. 0 - .4 B. 0 - .55 C. .4 - .7 D. .55 - 1 E. .7 - 1
AACSB: AS Difficulty: Hard TLO: 6 Taxonomy: Application
The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production. (Due to budgeting constraints, only one new picture can be undertaken at this time.) She feels that script #1 has a 70 percent chance of earning about $10,000,000 over the long run, but a 30 percent chance of losing $2,000,000. If this movie is successful, then a sequel could also be produced, with an 80 percent chance of earning $5,000,000, but a 20 percent chance of losing $1,000,000. On the other hand, she feels that script #2 has a 60 percent chance of earning $12,000,000, but a 40 percent chance of losing $3,000,000. If successful, its sequel would have a 50 percent chance of earning $8,000,000, but a 50 percent chance of losing $4,000,000. Of course, in either case, if the original movie were a "flop," then no sequel would be produced.
99. What would be the total payoff if script #1 were a success, but its sequel were not? A. $15,000,000 B. $10,000,000 C. $ 9,000,000 D. $ 5,000,000 E. $-1,000,000
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
100. What is the probability that script #1 will be a success, but its sequel will not? A. .8 B. .7 C. .56 D. .2 E. .14
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
101. What is the expected value of selecting script #1? A. $15,000,000 B. $ 9,060,000 C. $ 8,400,000 D. $ 7,200,000 E. $ 6,000,000
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
102. What is the expected value of selecting script #2? A. $15,000,000 B. $ 9,060,000 C. $ 8,400,000 D. $ 7,200,000 E. $ 6,000,000
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
103. What is the expected value for the optimum decision alternative? A. $15,000,000 B. $ 9,060,000 C. $ 8,400,000 D. $ 7,200,000 E. $ 6,000,000
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
One local hospital has just enough space and funds presently available to start either a cancer or heart research lab. If administration decides on the cancer lab, there is a 20 percent chance of getting $100,000 in outside funding from the American Cancer Society next year, and an 80 percent chance of getting nothing. If the cancer research lab is funded the first year, no additional outside funding will be available the second year. However, if it is not funded the first year, then management estimates the chances are 50 percent it will get $100,000 the following year, and 50 percent that it will get nothing again. If, however, Merciless's management decides to go with the heart lab, then there's a 50 percent chance of getting $50,000 in outside funding from the American Heart Association the first year and a 50 percent change of getting nothing. If the heart lab is funded the first year, management estimates a 40 percent chance of getting another $50,000 and a 60 percent chance of getting nothing additional the second year. If it is not funded the first year, then management estimates a 60 percent chance for getting $50,000 and a 40 percent chance for getting nothing in the following year. For both the cancer and heart research labs, no further possible funding is anticipated beyond the first two years.
104. What would be the total payoff if the heart lab were funded in both the first and second years? A. $100,000 B. $ 60,000 C. $ 50,000 D. $ 40,000 E. $ 20,000
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
5-42
Chapter 05S - Supplement: Decision Theory
105. What is the probability that the heart lab will be funded in both the first and second years? A. .4 B. .3 C. .2 D. .1 E. 0
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
106. What is the expected value for the decision alternative to select the cancer lab? A. $100,000 B. $ 60,000 C. $ 50,000 D. $ 40,000 E. $ 20,000
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
107. What is the expected value for the decision alternative to select the heart lab? A. $100,000 B. $ 60,000 C. $ 50,000 D. $ 40,000 E. $ 20,000
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
5-43
Chapter 05S - Supplement: Decision Theory
108. What is the expected value for the optimum decision alternative? A. $100,000 B. $ 60,000 C. $ 50,000 D. $ 40,000 E. $ 20,000
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
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 percent chance of placing it with a major publisher, and 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 percent chance of placing it with a smaller publisher, with ultimate sales of 30,000 copies. On the other hand, if they write a statistics book, they feel they have a 40 percent 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 percent chance of placing it with a smaller publisher, with ultimate sales of 35,000 copies.
109. What is the probability that the economics book would wind up being placed with a smaller publisher? A. .8 B. .5 C. .4 D. .2 E. .1
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
110. What is the probability that the statistics book would wind up being placed with a smaller publisher? A. .6 B. .5 C. .4 D. .3 E. 0
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
111. What is the expected value for the decision alternative 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
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
112. What is the expected value for the decision alternative 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
AACSB: AS Difficulty: Medium TLO: 4 Taxonomy: Application
5-45
Chapter 05S - Supplement: Decision Theory
113. What is the expected value 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
Difficulty: Medium TLO: 4 Taxonomy: Application
Essay Questions
114. If somehow you find out for certain that state of nature #4 is going to occur, which alternative will you select?
A=6
AACSB: AS Difficulty: Medium TLO: 1 Taxonomy: Application
5-46
Chapter 05S - Supplement: Decision Theory
115. If you are uncertain which state of nature will occur, and use the maximin criterion, which alternative will you select?
C=2
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
116. If you are uncertain which state of nature will occur, and use the maximax criterion, which alternative will you select?
A=6
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
117. If you are uncertain which state of nature will occur, and use the Laplace criterion, which alternative will you select?
B=3
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
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Chapter 05S - Supplement: Decision Theory
118. If you are uncertain which state of nature will occur, and use the minimax regret criterion, which alternative will you select?
C=3
AACSB: AS Difficulty: Medium TLO: 2 Taxonomy: Application
5-48
Chapter 05S - Supplement: Decision Theory
119. If you feel that P(#1) = .4, P(#2) = .3, P(#3) = .2, and P(#4) = .1, which alternative will you select?
B; EV=2.9
AACSB: AS Difficulty: Medium TLO: 3 Taxonomy: Application
120. If you feel that P(#1) = .4, P(#2) = .3, P(#3) = .2, and P(#4) = .1, what is your expected payoff under certainty?
EPC=4.1
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
121. If you feel that P(#1) = .4, P(#2) = .3, P(#3) = .2, and P(#4) = .1, what is your expected value of perfect information?
EVPI=1.2
AACSB: AS Difficulty: Medium TLO: 5 Taxonomy: Application
5-49