Chapter 08

Chapter 08 - CHAPTER 8 DECISION ANALYSIS SOLUTIONS TO...

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CHAPTER 8 DECISION ANALYSIS SOLUTIONS TO DISCUSSION QUESTIONS 8-1. The purpose of this question is to make students use a personal experience to distinguish between good and bad decisions. A good decision is based on logic and all of the available information. A bad decision is one that is not based on logic and the available information. It is possible for an unfortunate or undesirable outcome to occur after a good decision has been made. It is also possible to have a favorable or desirable outcome occur after a bad decision. 8-2. The decision-making process includes the following steps: (1) define the problem, (2) list the alternatives, (3) identify the possible outcomes, (4) evaluate the consequences, and (5) select an evaluation criterion and make the appropriate decision. The first four steps or procedures are common for all decision-making problems. Step 5, however, depends on the decision-making model used. 8-3. An alternative is a course of action over which we have complete control. A state of nature is an event or occurrence in which we have no control. An example of an alternative is deciding whether or not to take an umbrella to school or work on a particular day. An example of a state of nature is whether or not it will rain on a particular day. 8-4. The basic differences between decision-making models under certainty, risk, and uncertainty depend on the amount of chance or risk that is involved in the decision. A decision-making model under certainty assumes that we know with complete confidence the future outcomes. Decision-making-under-risk models assume that we do not know the outcomes for a particular decision but that we do know the probability of occurrence of those outcomes. With decision making under uncertainty, it is assumed that we do not know the outcomes that will occur, and furthermore, we do not know the probabilities that these outcomes will occur. 8-5. EMV is the expected monetary value. This is the expected return that we would realize if the decision were repeated an infinite number of times. EVwPI is the expected value with perfect information. This is the return or value of making the same decision an infinite number of times when we have perfect or complete information. EVPI is the expected value of perfect information. This is simply the difference between EMV and EVwPI. It is the amount that we would be willing to pay for perfect information. 8-6. A decision tree is preferred to a decision table when a number of sequential decisions are to be made. A sequential decision situation is one in which the outcome of one decision becomes an important factor in making future decisions. For example, if a decision maker is considering the possibility of acquiring additional information and a decision of whether or not to build a new plant, the decision to acquire the new information is made first. Then, based on the results of the new information (if it is gathered), the decision to build the plant is made. Therefore, these decisions are sequential. One is made before the
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Chapter 08 - CHAPTER 8 DECISION ANALYSIS SOLUTIONS TO...

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