Deck 7: Decision Theory– Static

Question 1

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

Answer 1

False

Question 2

A decision maker's worst option has an expected value of $1,000, and her best option has an expected value of $3,000. With perfect information, the expected value would be $5,000. The decision maker has discovered a firm that will, for a fee of $1,000, make her position-risk free. How much better off will her firm be if she takes this firm up on its offer?

A) $5,000
B) $4,000
C) $3,000
D) $2,000
E) $1,000

Answer 2

E

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Departmentalizing decisions increases the risk of __________ leading to a poor decision.

A) bounded rationality
B) suboptimization
C) risk aversion
D) misspecification
E) complexification

Question 8

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

Question 9

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

Question 10

In a decision-making setting, if the manager has to contend with limits on the amount of information he or she can consider, this can lead to a poor decision due to __________.

A) bounded rationality
B) suboptimization
C) risk aversion
D) misspecification
E) complexification

Question 11

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

Question 12

Option A has an expected value of $2,000, a minimum payoff of -$4,000, and a maximum payoff of $18,000. Option B has an expected value of $2,200, a minimum payoff of -$1,000, and a maximum payoff of $6,000. Option C has an expected value of $1,900, a minimum payoff of $100, and a maximum payoff of $2,000. In this situation, a risk-averse decision maker would pay __________ for his risk aversion, and a risk-seeking decision maker would pay __________ for his risk seeking.

A) $200; $300
B) $1,100; $5,000
C) $300; $200
D) $2,100; $16,000
E) $400; $200

Question 13

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

Question 14

The maximax approach is a pessimistic strategy.

Question 15

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

Question 16

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

Question 17

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

Question 18

Suppose a firm has decided to break its departments down into smaller units. While this likely will help with __________ issues, it raises the possibility that poor decisions will result due to __________.

A) risk aversion;suboptimization
B) economies of scale; risk aversion
C) span of control;suboptimization
D) span of control; risk aversion
E) economies of scale; limited span of control

Question 19

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

Question 20

A decision maker's worst option has an expected value of $1,000, and her best option has an expected value of $3,000. With perfect information, the expected value would be $5,000. What is the expected value of perfect information?

A) $5,000
B) $4,000
C) $3,000
D) $2,000
E) $1,000

Question 21

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 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

Question 23

The range of probability for which an alternative has the best expected payoff can be determined by:

A) simulation.
B) sensitivity analysis.
C) priority recognition.
D) analysis of variance.
E) decision analysis.

Question 24

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 25

Consider the following decision scenario:
The maximax strategy would be:

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

Question 26

Consider the following decision scenario:
The maximin strategy would be:

A) buy.
B) lease.
C) rent.
D) rent or leasE.
E) buy low.

Question 27

Consider the following decision scenario:
The minimax regret strategy would be:

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

Question 28

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 29

The term "suboptimization" is best described as the:

A) result of individual departments making the best decisions for their own areas but hurting other 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) optimization on a micro level that extends to the macro level.

Question 30

The term "opportunity loss" is most closely associated with:

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

Question 31

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 32

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 33

Sensitivity analysis is useful because:

A) payoffs and probabilities are estimates.
B) most decisions will affect employees.
C) expected payoffs are sensitive to the time value of money.
D) it is the second step in the decision model.
E) with the passage of time, small decisions get bigger.

Question 34

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 35

A tabular presentation that shows the outcome for each decision alternative under the various possible states of nature is called a:

A) payoff tablE.
B) feasible region.
C) Laplace table.
D) decision tree.
E) payback period matrix.

Question 36

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 37

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 38

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) Lack of knowledge about how risk-averse the decision maker is.

Question 39

The expected monetary value (EMV) criterion is the decision-making approach used with the decision environment of:

A) certainty.
B) risk.
C) uncertainty.
D) aversion.
E) neutrality.

Question 40

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) risk-seeking.

Question 41

Consider the following decision scenario:
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 42

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:
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 43

Consider the following decision scenario:
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 44

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, medium, or high, as follows:
If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent 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 45

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 she has estimated demand in three categories, low, medium, and high.
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 46

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 she has estimated demand in three categories, low, medium, and high.
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 47

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, medium, or high, as follows:
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 48

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, medium, or high, as follows:
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 49

Consider the following decision scenario:
The maximin strategy would be:

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

Question 50

Consider the following decision scenario:
The minimax regret strategy would be:

A) A.
B) B.
C) C.
D) D.
E) E.

Question 51

Consider the following decision scenario:
The maximin strategy would be:

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

Question 52

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, medium, or high, as follows: If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent 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 53

Consider the following decision scenario:
The maximax strategy would be:

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

Question 54

Consider the following decision scenario:
The maximin strategy would be:

A) A.
B) B.
C) C.
D) D.
E) E.

Question 55

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

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

Question 56

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, medium, or high, as follows:
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 57

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 she has estimated demand in three categories, low, medium, and high. 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 58

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 she has estimated demand in three categories, low, medium, and high.
If she feels the chances of low, medium, and high demand are 50 percent, 20 percent, and 30 percent 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) $50,000
E) $154,000

Question 59

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 she has estimated demand in three categories, low, medium, and high.
If she feels the chances of low, medium, and high demand are 50 percent, 20 percent, and 30 percent respectively, what is her expected value of perfect information?

A) $54,000
B) $65,000
C) $70,000
D) $80,000
E) $135,000

Question 60

Consider the following decision scenario:
The maximax strategy would be:

A) A.
B) B.
C) C.
D) D.
E) E.

Question 61

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows:
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

Question 62

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows:
If he feels the chances of declining, stable, and growing population trends are 40 percent, 50 percent, and 10 percent, 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 63

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:
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 64

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows:
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 65

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:
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

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: 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

Question 67

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:
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

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows: If he feels the chances of declining, stable, and growing population trends are 40 percent, 50 percent, and 10 percent, respectively, what is his expected value of perfect information?

A) $187,000
B) $132,000
C) $122,000
D) $64,000
E) $55,000

Question 69

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: 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 70

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:
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 71

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:
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 72

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows: 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 73

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:
If he feels the chances of low, normal, and high precipitation are 30 percent, 20 percent, and 50 percent 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 74

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:
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 75

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: If he feels the chances of low, normal, and high precipitation are 30 percent, 20 percent, and 50 percent 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 76

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:
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

Question 77

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:
If she feels there is a 30 percent 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

Question 78

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: If she feels there is a 30 percent 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

Question 79

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:
If she feels the chances of low, medium, and high compliance are 20 percent, 30 percent, and 50 percent 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 80

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: If she feels the chances of low, medium, and high compliance are 20 percent, 30 percent, and 50 percent 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