Question 1

A decision tree
A)presents all decision alternatives first and follows them with all states of nature.
B)presents all states of nature first and follows them with all decision alternatives.
C)alternates the decision alternatives and states of nature.
D)arranges decision alternatives and states of nature in their natural chronological order.

Accepted Answer

Decision trees arrange decision alternatives and states of nature in their natural chronological order, allowing for a visual representation of decisions and their possible outcomes over time.

Question 2

The efficiency of sample information is
A)EVSI*(100%).
B)EVSI/EVPI*(100%).
C)EVwoSI/EVwoPI*(100%).
D)EVwSI/EVwoSI*(100%).

Accepted Answer

The efficiency of sample information is calculated as the Expected Value of Sample Information (EVSI) divided by the Expected Value of Perfect Information (EVPI), then multiplied by 100% to express it as a percentage.

Question 3

When the expected utility approach and the expected value approach applied to monetary payoffs result in the same action,these are characteristics generally associated with a risk-neutral decision maker.

Accepted Answer

When the expected utility approach and the expected value approach lead to the same action, it suggests that the decision maker is not factoring in any personal risk preferences and is therefore considered risk-neutral.

Question 4

States of nature
A)are the possible outcomes for a chance event.
B)can be selected by the decision maker.
C)cannot be enumerated by the decision maker.
D)None of these are correct.

Accepted Answer

States of nature are the possible outcomes for a chance event. They represent the different scenarios that may occur in the future and are usually associated with probabilities or likelihoods of occurrence. The decision maker has no control over the states of nature, but must choose a course of action that takes into account the likelihood and consequences of each possible state of nature. Therefore, option A is the best choice.

Question 5

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

Accepted Answer

A risk avoider is someone who makes decisions based on the certainty of a payoff, rather than the potential of a higher payoff with greater risk. Therefore, they would choose the guaranteed payoff over a potentially higher but unpredictable lottery payout.

Question 6

Decision tree probabilities refer to the probability of
A)finding the optimal strategy.
B)the decision being made.
C)overlooked choices.
D)an uncertain event occurring.

Accepted Answer

Decision tree probabilities refer to the likelihood of an uncertain event occurring, such as the chance of a particular outcome or result. Therefore, answer choice D is the best option. A, B, and C are not accurate as they do not address the concept of probabilities in decision tree analysis.

Question 7

Utility is the term for a measure of the total worth or relative desirability of a particular outcome.

Accepted Answer

This is the correct definition of utility in economics.

Question 8

For a maximization problem,the conservative approach is often referred to as the
A)minimax approach.
B)maximin approach.
C)maximax approach.
D)minimin approach.

Accepted Answer

The maximization problem requires finding the maximum value of the objective function subject to certain constraints. In the maximin approach, the decision maker chooses the alternative that maximizes the minimum possible outcome. This approach is conservative because it aims to minimize the potential loss or regret associated with the decision. Therefore, the best choice for a maximization problem is the maximin approach (Option B).

Question 9

Making a good decision
A)requires probabilities for all states of nature.
B)requires a clear understanding of decision alternatives,states of nature,and payoffs.
C)implies that a desirable outcome will occur.
D)All of these are correct.

Accepted Answer

Making a good decision requires a clear understanding of decision alternatives, states of nature, and payoffs. This means that you must know what options are available, what potential outcomes can occur, and what the benefits or costs are for each outcome. While having probabilities for all states of nature (option A) can be helpful, it is not always necessary for making a good decision. Option C is not necessarily true, as a desirable outcome may not always occur. Therefore, option B is the best choice.

Question 10

The expected utility is the utility of the expected monetary value.

Accepted Answer

Expected utility is a concept in economics and decision theory where the utility (satisfaction or value) of an outcome is weighted by the probability of its occurrence, rather than simply being the utility of the expected monetary value. It accounts for the individual's risk preferences.

Question 11

When monetary value is not the sole measure of the true worth of the outcome to the decision maker,monetary value should be replaced by utility.

Accepted Answer

When making decisions, the decision maker may consider other factors besides monetary value, such as personal values, emotions, and preferences. Utility refers to the satisfaction or benefit that a decision brings to the decision maker, taking into account these non-monetary factors. Therefore, when monetary value is not the sole measure of the true worth of the outcome, utility should be used as a measure of the decision's value.

Question 12

Sensitivity analysis
A)considers how sensitive the decision maker is to risk.
B)considers how changes in the number of states of nature can impact the recommended decision.
C)considers how changes in various aspects of the problem affect the recommended decision alternative.
D)None of these are correct.

Accepted Answer

Sensitivity analysis considers how changes in various aspects of the problem affect the recommended decision alternative. It is a tool to assess the robustness of a decision and understand the impact of uncertainty or changes in assumptions on the recommended course of action. Option A considers only the decision maker's risk profile, and option B focuses on the number of states of nature, which may not cover various factors that may affect the decision-making process.

Question 13

The utility function for a risk avoider typically shows a diminishing marginal return for money.​

Accepted Answer

A risk avoider is willing to pay a premium - in terms of accepting lower expected returns - to avoid risk or uncertainty. As the amount of money they have increases, the marginal benefit they derive from each additional dollar decreases or diminishes. This is known as diminishing marginal utility, which is a fundamental concept in economics. Therefore, the utility function for a risk avoider typically shows a diminishing marginal return for money.

Question 14

As long as the monetary value of payoffs stays within a range that the decision maker considers reasonable,selecting the decision alternative with the best expected value usually leads to selection of the most preferred decision.

Accepted Answer

As long as the payoffs are within a reasonable range, selecting the decision alternative with the best expected value tends to lead to the selection of the most preferred decision. This is because expected value takes into account both the likelihood and magnitude of each outcome, providing a rational way to compare alternatives. However, if the payoffs go beyond the decision maker's acceptable range (e.g. if the potential losses are too large), they may not choose the option with the highest expected value even if it is technically the best choice.

Question 15

Given two decision makers,one a risk taker and the other a risk avoider,the risk avoider will show a diminishing marginal return for money.

Accepted Answer

Diminishing marginal return for money means that the more money the risk avoider has, the less utility (or satisfaction) they will derive from each additional unit of money. This is because the risk avoider is typically more concerned with avoiding losses than gaining profits, and as their wealth increases, their fear of losing it also increases. In contrast, the risk taker may continue to derive increasing utility from each additional unit of money, as they see opportunities for growth and potential returns.

Question 16

To find the expected value of sample information (EVSI),
A)use prior and sample information probabilities to calculate revised probabilities.
B)use indicator probabilities to calculate prior probabilities.
C)use sample information to revise the sample information probabilities.
D)None of these are correct.

Accepted Answer

The expected value of sample information (EVSI) involves using both prior and sample information to calculate revised probabilities. By combining these different sources of information, a more accurate and informed decision can be made, which is the ultimate goal of EVSI analysis. Therefore, choice A is the best option. Choices B and C are incorrect because they only consider one type of information (either prior or sample), and therefore do not provide a comprehensive analysis of the decision problem. Choice D is incorrect because EVSI does involve calculating revised probabilities based on prior and sample information.

Question 17

The options from which a decision maker chooses a course of action are
A)called the decision alternatives.
B)not under the control of the decision maker.
C)the same as the states of nature.
D)None of these are correct.

Accepted Answer

The options or choices available to a decision maker are called decision alternatives. Therefore, option A is the correct choice. Option B is incorrect because the decision maker has control over the available options. Option C is also incorrect because states of nature refer to events or conditions outside of the decision maker's control that may affect the outcome of their decision. Option D is incorrect as choice A is correct.

Question 18

If P(high)= 0.3,P(low)= 0.7,P(favorable | high)= 0.9,and P(unfavorable | low)= 0.6,then P(favorable)=
A)0.10.
B)0.27.
C)0.30.
D)0.55.

Accepted Answer

To find P(favorable), use the law of total probability: P(favorable) = P(favorable | high) * P(high) + P(favorable | low) * P(low). Given P(favorable | low) = 1 - P(unfavorable | low) = 0.4, so P(favorable) = 0.9 * 0.3 + 0.4 * 0.7 = 0.27 + 0.28 = 0.55.

Question 19

A payoff
A)is always measured in profit.
B)is always measured in cost.
C)exists for each pair of a decision alternative and a state of nature.
D)exists for each state of nature.

Accepted Answer

Payoff exists for each pair of a decision alternative and a state of nature. This means that the expected outcome of choosing a particular decision alternative depends on the possible outcomes associated with each state of nature. Therefore, the payoff is not always measured in profit or cost, and it is not necessarily associated with each state of nature, but with each pair of decision alternative and state of nature.

Question 20

Which of the following methods for decision making best protects the decision maker from undesirable results?
A)the optimistic approach
B)the conservative approach
C)minimum regret
D)minimax regret

Accepted Answer

The conservative approach best protects the decision maker from undesirable results by assuming the worst-case scenario for each decision option and then choosing the option with the best (least negative) worst-case outcome. This approach minimizes potential losses, making it the safest choice among the options listed.

Quiz 13: Decision Analysis

A decision tree

The efficiency of sample information is

When the expected utility approach and the expected value approach applied to monetary payoffs result in the same action,these are characteristics generally associated with a risk-neutral decision maker.

States of nature

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

Decision tree probabilities refer to the probability of

Utility is the term for a measure of the total worth or relative desirability of a particular outcome.

For a maximization problem,the conservative approach is often referred to as the

Making a good decision

The expected utility is the utility of the expected monetary value.

When monetary value is not the sole measure of the true worth of the outcome to the decision maker,monetary value should be replaced by utility.

Sensitivity analysis

The utility function for a risk avoider typically shows a diminishing marginal return for money.

As long as the monetary value of payoffs stays within a range that the decision maker considers reasonable,selecting the decision alternative with the best expected value usually leads to selection of the most preferred decision.

Given two decision makers,one a risk taker and the other a risk avoider,the risk avoider will show a diminishing marginal return for money.

To find the expected value of sample information (EVSI) ,

The options from which a decision maker chooses a course of action are

If P(high) = 0.3,P(low) = 0.7,P(favorable | high) = 0.9,and P(unfavorable | low) = 0.6,then P(favorable) =

A payoff

Which of the following methods for decision making best protects the decision maker from undesirable results?

Quiz 13: Decision Analysis

A decision tree

The efficiency of sample information is

When the expected utility approach and the expected value approach applied to monetary payoffs result in the same action,these are characteristics generally associated with a risk-neutral decision maker.

States of nature

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

Decision tree probabilities refer to the probability of

Utility is the term for a measure of the total worth or relative desirability of a particular outcome.

For a maximization problem,the conservative approach is often referred to as the

Making a good decision

The expected utility is the utility of the expected monetary value.

When monetary value is not the sole measure of the true worth of the outcome to the decision maker,monetary value should be replaced by utility.

Sensitivity analysis

The utility function for a risk avoider typically shows a diminishing marginal return for money.​

As long as the monetary value of payoffs stays within a range that the decision maker considers reasonable,selecting the decision alternative with the best expected value usually leads to selection of the most preferred decision.

Given two decision makers,one a risk taker and the other a risk avoider,the risk avoider will show a diminishing marginal return for money.

To find the expected value of sample information (EVSI) ,

The options from which a decision maker chooses a course of action are

If P(high) = 0.3,P(low) = 0.7,P(favorable | high) = 0.9,and P(unfavorable | low) = 0.6,then P(favorable) =

A payoff

Which of the following methods for decision making best protects the decision maker from undesirable results?

The utility function for a risk avoider typically shows a diminishing marginal return for money.