Question 1

For a particular maximization problem, the payoff for 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.

Accepted Answer

In decision analysis, the regret for a particular decision alternative is the absolute difference between the payoff associated with the best decision alternative and the payoff associated with the chosen decision alternative.
In this case, the regret would be $15.7 million - $12.9 million = $2.8 million.

Question 2

_____ 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

Accepted Answer

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

Question 3

Which of the following tools is used to create decision trees in Excel?
A) MegaStat
B) Analytic Solver Platform
C) Arena
D) Data Analysis

Accepted Answer

Analytic Solver Platform is used to create decision trees in Excel.

Question 4

_____ refers to the probability of one event, given the known outcome of a (possibly) related event.
A) Joint probability
B) A priori probability
C) Decisive probability
D) Conditional probability

Accepted Answer

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

Question 5

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.

Accepted Answer

A curve that depicts the relationship between monetary value and utility is known as the utility function for money.

Question 6

The parameter R in an exponential utility function represents
A) the decision maker's risk tolerance.
B) the utility function's error tolerance.
C) the posterior probability.
D) the likely profit/loss from the investment.

Accepted Answer

The parameter R in an exponential utility function represents the decision maker's risk tolerance.
Problems

Question 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

Sensitivity analysis is the study of how changes in the probability assessments for the states of nature or changes in the payoffs affect the recommended decision alternative.

Question 9

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.

Accepted Answer

The minimax regret approach is neither purely optimistic nor purely conservative.

Question 10

_____ 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

Accepted Answer

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

Question 11

The probabilities of both sample information and a particular state of nature occurring simultaneously are termed as _____.
A) joint probabilities
B) probable probabilities
C) preliminary probabilities
D) posterior probabilities

Accepted Answer

The probabilities of both sample information and a particular state of nature occurring simultaneously are termed as joint probabilities.

Question 12

Reference - 12.2: Use the data below and Bayes' theorem to answer questions 34-35.
 
-Reference - 12.2: What would be the joint probabilities, P(U ∩ Sj)?
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

Accepted Answer

The joint probabilities are computed by multiplying the prior probability values by the corresponding conditional probability values. Thus, the required probabilities are 0.49 (0.4875 rounded to 2 decimal places), 0.07, and 0.03, respectively.

Question 13

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

Accepted Answer

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

Question 14

Exponential utility functions indicate that the decision maker is _____.
A) risk monitor
B) risk averse
C) risk neutral
D) risk taker

Accepted Answer

All exponential utility functions indicate that the decision maker is risk averse.

Question 15

_____ 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

Accepted Answer

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

Question 16

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

Accepted Answer

The difference between the expected value associated with sample information about the states of nature and the expected value associated without sample information about the states of nature gives the required expected value of sample information as $2.17 million. In other words, conducting the market research study adds a value of $2.17 million.

Question 17

Reference - 12.2: Use the data below and Bayes' theorem to answer questions 34-35.
 
-Reference - 12.2: Which of the following would be the posterior probabilities, P(Sj|U)?
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

Accepted Answer

To obtain the revised or posterior probabilities, divide each joint probability by their sum. The required probabilities are, therefore, 0.49/0.59, 0.07/0.59, 0.03/0.59 or about 0.83, 0.12, 0.05, respectively.

Question 18

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

Accepted Answer

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 perfect information.

Question 19

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.

Accepted Answer

Bayes' theorem is a theorem that enables the use of sample information to revise prior probabilities.

Question 20

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

Accepted Answer

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

Quiz 12: Decision Analysis

For a particular maximization problem, the payoff for 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

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

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

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

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

The parameter R in an exponential utility function represents

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

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 _____.

The minimax regret approach is

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

The probabilities of both sample information and a particular state of nature occurring simultaneously are termed as _____.

Reference - 12.2: Use the data below and Bayes' theorem to answer questions 34-35. -Reference - 12.2: What would be the joint probabilities, P(U ∩ Sj) ?

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

Exponential utility functions indicate that the decision maker is _____.

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

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?

Reference - 12.2: Use the data below and Bayes' theorem to answer questions 34-35. -Reference - 12.2: Which of the following would be the posterior probabilities, P(Sj|U) ?

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.

Bayes' theorem

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