Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%.
-The ____ in a decision problem represent factors that are important to the decision maker.
A) payoffs
B) states of nature
C) criteria
D) alternatives

Question

Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%. 
-The ____ in a decision problem represent factors that are important to the decision maker.
A) payoffs 
B) states of nature 
C) criteria 
D) alternatives

Quizplus · Accepted Answer

The best choice is based on the criteria of maximum expected monetary value. The expected monetary value (EMV) for each alternative is calculated by multiplying the payoff for each state of nature by its probability, and then summing these values. The alternative with the highest EMV is the best choice. In this case, alternative C has the highest EMV of $80,000, making it the best choice.

Exhibit 14.5 The Following Questions Are Based on the Information Below