Deck 21: Extension 5: Decision Theory

Question 1

The expected value approach is used for decision-making under risk.

Answer 1

True

Question 2

The expected value approach applies to decision-making under uncertainty.

Answer 2

False

Question 3

The maximax approach is a pessimistic strategy.

Answer 3

False

Question 4

Graphical sensitivity analysis is used for decision-making under risk.

Question 5

The expected monetary value approach is most appropriate when the decision-maker is risk-neutral.

Question 6

The Laplace criterion treats states of nature as being equally likely.

Question 7

Among decision environments, uncertainty implies that states of nature have wide ranging probabilities associated with them.

Question 8

The EVPI indicates an upper limit on the amount a decision-maker should be willing to spend to obtain additional information.

Question 9

Among decision environments, risk implies that certain parameters have probabilistic outcomes.

Question 10

In decision theory, states of nature refer to possible future conditions.

Question 11

Graphical sensitivity analysis is limited to cases with no more than two alternatives.

Question 12

Decision trees, with their predetermined analysis of a situation, are really not useful in making health care decisions since every person is unique.

Question 13

Expected monetary value gives the long-run average payoff if a large number of identical decisions could be made.

Question 14

The value of perfect information is inversely related to losses predicted.

Question 15

In reaching a decision, the alternative with the lowest cost should be ranked #1.

Question 16

The maximin approach involves choosing the alternative that has the "best worst" payoff.

Question 17

A weakness of the maximin approach is that it loses some information.

Question 18

The maximin approach involves choosing the alternative with the highest payoff.

Question 19

An advantage of decision trees compared to payoff tables is that they permit us to analyze situations involving sequential decisions.

Question 20

Bounded rationality refers to the limits imposed on decision-making because of costs, human abilities, time, technology, and/or availability of information.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 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

Question 28

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.

Question 29

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

Question 30

The term opportunity loss or regret is most closely associated with:

A)minimax regret
B)maximax
C)maximin
D)expected monetary value
E)Laplace

Question 31

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

Question 32

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.

Question 33

A manager has developed the following payoff table that indicates the profits associated with a set of alternatives under two possible states of nature.

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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.

Question 39

The term sensitivity analysis is most closely associated with:

A)maximax
B)maximin
C)decision-making under risk
D)minimax regret
E)Laplace criterion

Question 40

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

Question 41

The minimax regret strategy would be:

A)A
B)B
C)C
D)D
E)E

Question 42

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

Question 43

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?

Question 44

If P(high) is .60, the choice for maximum expected value would be:

A)buy
B)lease
C)rent
D)high
E)low

Question 45

The maximin strategy would be:

A)A
B)B
C)C
D)D
E)E

Question 46

The maximax strategy would be:

A)A
B)B
C)C
D)D
E)E

Question 47

The maximin strategy would be:

A)buy
B)lease
C)rent
D)high
E)low

Question 48

The maximin strategy would be:

A)small
B)Medium
C)med.-large
D)large
E)ex-large

Question 49

The minimax regret strategy would be:

A)buy
B)lease
C)rent
D)high
E)low

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

The maximax strategy would be:

A)small
B)Medium
C)med.-large
D)large
E)ex-large

Question 55

The maximax strategy would be:

A)buy
B)lease
C)rent
D)high
E)low

Question 56

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

Question 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

Question 58

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

Question 59

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

Question 60

The minimax regret strategy would be:

A)small
B)Medium
C)med.-large
D)large
E)ex-large

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

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

Question 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

Question 67

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

Question 68

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

Question 69

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

Question 70

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

Question 71

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

Question 72

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

Question 73

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

Question 74

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

Question 75

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

Question 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

Question 77

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

Question 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

Question 79

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

Question 80

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