Deck 15: Decision Analysis

Question 1

___________ are graphical representations of the decision problems that show the sequential nature of the decision-making process.

A)Influence diagrams
B)Utility functions
C)Decision trees
D)Payoff tables

Answer 1

Decision trees

Question 2

The __________ approach evaluates each decision alternative in terms of the best payoff that can occur.

A)conservative
B)optimistic
C)maximin regret
D)expected value

Answer 2

optimistic

Question 3

Choosing a decision alternative that maximizes the minimum profit is a feature of the __________ approach.

A)expected value
B)optimistic
C)conservative
D)maximin regret

Answer 3

conservative

Question 4

For a maximization problem, the optimistic approach often is referred to as the __________ approach.

A)minimin
B)maximin
C)minimax
D)maximax

Question 5

No more than one state of nature can occur at a given time for a chance event. This indicates that the states of nature are defined such that they are

A)collectively exhaustive.
B)mutually exclusive.
C)independent outcomes.
D)conservative events.

Question 6

Using the Table below, which is the recommended decision alternative using the optimistic approach? ? $$\begin{array}{l}\text { Payoff Table }\\\begin{array} { | c | c | c | } \hline \text { Decision Alternative } & \text { State of Nature 1 } & \text { State of Nature 2 } \\\hline d _ { 1 } & 5 & 7 \\\hline d _ { 2 } & - 4 & 1 \\\hline d _ { 3 } & 1 & - 3 \\\hline d _ { 4 } & 10 & 2 \\\hline d _ { 5 } & 6 & 4 \\\hline\end{array}\end{array}$$

A)d₁
B)d₄
C)d₂
D)d₅

Question 7

Chance nodes are

A)nodes provided at the end of the states-of-nature branches.
B)nodes indicating points where an uncertain event will occur.
C)nodes provided at the end of the decision alternative branches where a payoff is shown.
D)nodes indicating points where a decision is made.

Question 8

For a minimization problem, the optimistic approach often is referred to as the __________ approach.

A)maximin
B)minimax
C)minimin
D)maximax

Question 9

A(n) _________ refers to the result obtained when a decision alternative is chosen and a chance event occurs.

A)payoff table
B)outcome
C)state of nature
D)node

Question 10

Lines showing the alternatives from decision nodes and the outcomes from chance nodes are called

A)weights.
B)payoffs.
C)diagonals.
D)branches.

Question 11

_____________ are possible outcomes for chance events that affect the consequences associated with a decision alternative.

A)Payoffs
B)Forecasts
C)Decision trees
D)States of nature

Question 12

Which of the following is true of decision trees when used to solve a complex problem?

A)They provide a useful way to decompose the problem.
B)They are used to compute a decision maker's risk tolerance.
C)They can be converted into truth tables.
D)They can be used only when the decision maker is risk neutral.

Question 13

Using the Table below, which is the recommended decision alternative using the conservative approach? ? $$\begin{array}{l}\text { Payoff Table }\\\begin{array} { | c | c | c | } \hline \text { Decision Alternative } & \text { State of Nature 1 } & \text { State of Nature 2 } \\\hline d _ { 1 } & 5 & 7 \\\hline d _ { 2 } & - 4 & 1 \\\hline d _ { 3 } & 1 & - 3 \\\hline d _ { 4 } & 10 & 2 \\\hline d _ { 5 } & 6 & 4 \\\hline\end{array}\end{array}$$

A)d₁
B)d₅
C)d₂
D)d₃

Question 14

Brett wants to sell throw blankets for the holiday season at a local flea market. Brett purchases the throws for $15 and sells them to his customers for $35. The rental space is fixed fee of $1,500 for the season. Assume there is no leftover value for unsold units. If he orders 200 and demand is 150, what is the payoff?

A)$800
B)$50
C)$750
D)$2,800

Question 15

The amount of loss (lower profit or higher cost) from not making the best decision for each state of nature is known as

A)best payoff.
B)opportunity loss.
C)risk profile.
D)utility.

Question 16

An uncertain future event affecting the consequence associated with a decision is known as a

A)chance event.
B)decision alternative.
C)decision node.
D)payoff.

Question 17

An intersection or junction point of a decision tree is called a(n)

A)node.
B)stem.
C)intercept.
D)branch.

Question 18

The states of nature are defined so that they are ___________. This means that at least one state of nature must occur at a given time for a chance event.

A)collectively exhaustive
B)mutually exclusive
C)certain events
D)optimistic outcomes

Question 19

The minimax regret approach is

A)purely optimistic.
B)purely conservative.
C)both purely optimistic and purely conservative.
D)neither purely optimistic nor purely conservative.

Question 20

A measure of the outcome of a decision such as profit, cost, or time is known as a

A)branch.
B)payoff.
C)regret.
D)forecasting index.

Question 21

__________ is the study of the possible payoffs and probabilities associated with a decision alternative or a decision strategy in the face of uncertainty.

A)Risk analysis
B)Cost analysis
C)Certainty analysis
D)Optimization

Question 22

Which of the following tools is used to create decision trees in Excel?

A)WhatIf
B)Analytic Solver Platform
C)GoalSeek
D)Data Analysis

Question 23

The parameter R in an exponential utility function represents the

A)decision maker's risk tolerance.
B)utility function's error tolerance.
C)posterior probability.
D)likely profit/loss from the investment.

Question 24

Bayes' theorem

A)can be used only for cases where conditional probabilities are unknown.
B)cannot be used to calculate posterior probabilities.
C)enables the use of sample information to revise prior probabilities.
D)is useful for determining optimal decisions without requiring knowledge of probabilities of the states of nature.

Question 25

Exponential utility functions assume that the decision maker is

A)a risk monitor.
B)risk averse.
C)risk neutral.
D)a risk taker.

Question 26

A __________ is a decision maker who would choose a guaranteed payoff over a lottery with a better expected payoff.

A)risk taker
B)risk-neutral
C)risk avoider
D)risk-creator

Question 27

What would be the value added by a market analysis undertaken if the expected value with sample information is $8.56 million and the expected value without sample information is $6.39 million?

A)$8.56 million
B)$6.39 million
C)$2.17 million
D)$14.95 million

Question 28

New information obtained through research or experimentation that enables an updating or revision of the state-of-nature probabilities is known as

A)joint probability.
B)sample information.
C)conditional probability.
D)expected utility.

Question 29

Using the data below, what would be the joint probabilities, P(U ? S_j)? ? $$\begin{array} { c c c } \begin{array} { c } \text { States of Nature } \\( s j )\end{array} & \begin{array} { c } \text { Prior } \\\text { Probabilities } \\P ( s j )\end{array} & \begin{array} { c } \text { Conditional } \\\text { Probabilities } \\P ( U \mid s j )\end{array} \\\hline s 1 & 0.65 & 0.75 \\s 2 & 0.20 & 0.35 \\s 3 & 0.15 & 0.20 \\\hline \text { Total } & 1.00 & \\\hline\end{array}$$

A)0.83, 0.12, and 0.05
B)0.49, 0.07, and 0.03
C)0.47, 0.49, and 0.04
D)1.00, 0.59, and 1.00

Question 30

Using the data below, which of the following would be the posterior probabilities, P(S_j | U)? ?
? $$\begin{array} { c c c } \begin{array} { c } \text { States of Nature } \\( s j )\end{array} & \begin{array} { c } \text { Prior } \\\text { Probabilities } \\P ( s j )\end{array} & \begin{array} { c } \text { Conditional } \\\text { Probabilities } \\P ( U \mid s j )\end{array} \\\hline s 1 & 0.65 & 0.75 \\s 2 & 0.20 & 0.35 \\s 3 & 0.15 & 0.20 \\\hline \text { Total } & 1.00 & \\\hline\end{array}$$ ?

A)0.83, 0.12, and 0.05
B)0.49, 0.07, and 0.03
C)0.47, 0.49, and 0.04
D)1.00, 0.59, and 1.00

Question 31

The study of how changes in the probability assessments for the states of nature or changes in the payoffs affect the recommended decision alternative is known as

A)uncertainty analysis.
B)cost analysis.
C)sensitivity analysis.
D)probability analysis.

Question 32

Which of the following is the value of e, the mathematical constant used in the exponential utility function, U(x) = 1 - e^-x/R?

A)3.14159
B)2.71828
C)1
D)The value of e depends on the risk tolerance value.

Question 33

__________ refers to the probability of one event, given the known outcome of a (possibly) related event.

A)Joint probability
B)Priori probability
C)Decisive probability
D)Conditional probability

Question 34

__________ is a measure of the total worth of a consequence reflecting a decision maker's attitude toward considerations such as profit, loss, and risk.

A)Cost-to-company
B)Utility
C)Decision value
D)Regret

Question 35

A special case of sample information where the information tells the decision maker exactly which state of nature is going to occur is known as __________ information.

A)perfect
B)mutual
C)conditional
D)prior

Question 36

The parameter R in the exponential utility function U(x) = 1 - e^-x/R represents the decision maker's risk tolerance. Larger values of R indicate that the decision maker

A)is less risk averse (closer to neutral).
B)is more risk averse (has less risk tolerance).
C)is not concerned with risk.
D)will accept the gamble.

Question 37

The weighted average of the payoffs for a chance node is known as the

A)median value.
B)variance of the node.
C)risk measure.
D)expected value.

Question 38

For a particular maximization problem, the payoff for the best decision alternative is $15.7 million while the payoff for one of the other alternatives is $12.9 million. The regret associated with the alternate decision would be

A)$28.6 million.
B)$15.7 million.
C)$0.129 million.
D)$2.8 million.

Question 39

The utility function for money is a curve that depicts the relationship between

A)decision alternative and utility.
B)branch probabilities and utility.
C)regret and utility.
D)monetary value and utility.

Question 40

__________ refer to the probabilities of the states of nature after revising the prior probabilities based on sample information.

A)Preliminary probabilities
B)Perfect probabilities
C)Joint probabilities
D)Posterior probabilities