Question 1

If a decision maker knows for sure which state of nature will occur,he/she is making a decision under certainty.

Accepted Answer

When the decision maker knows for sure which state of nature will occur, there is no uncertainty involved and hence the decision is made under certainty.

Question 2

A retailer is deciding how many units of a certain product to stock.The historical probability distribution of sales for this product is 0 units,0.2;1 unit,0.3;2 units,0.4,and 3 units,0.1.The product costs $8 per unit and sells for $25 per unit.What is the conditional value for the decision alternative "Stock 3" and state of nature "Sell 1"?
A)1.4 units
B)$1 profit
C)$25 profit
D)$-8 profit
E)$23.80 profit

Accepted Answer

The conditional value for the decision alternative "Stock 3" and state of nature "Sell 1" can be calculated as follows:
Conditional Value = (Probability of selling 1 unit given that 3 units are stocked) x (Profit from stocking 3 units)
Probability of selling 1 unit given that 3 units are stocked = 0.1 (from the probability distribution)
Profit from stocking 3 units = (Revenue from selling 1 unit - Cost of stocking 3 units) = ($25 - $8x3) = $1
Therefore, Conditional Value = 0.1 x $1 = $0.10
Since the conditional value is positive, stocking 3 units is a profitable decision. However, it is not the best choice as there may be other decision alternatives with higher conditional values.

Question 3

A plant manager wants to know how much he should be willing to pay for perfect market research.Currently there are two states of nature facing his decision to expand or do nothing.Under favorable market conditions the manager would make $100,000 for the large plant and $5,000 for the small plant.Under unfavorable market conditions the large plant would lose $50,000 and the small plant would make $0.If the two states of nature are equally likely,how much should he pay for perfect information?
A)$0
B)$25,000
C)$50,000
D)$100,000
E)$145,000

Accepted Answer

To find the expected value of perfect information (EVPI), we first need to calculate the expected value of each decision without perfect information.

Expected value of expanding = (0.5 x $100,000) + (0.5 x -$50,000) = $25,000
Expected value of not expanding = (0.5 x $5,000) + (0.5 x $0) = $2,500

The EVPI is the difference between the expected value of perfect information (EVPI) and the expected value of the decision without perfect information (EVw/oPI).

EVPI = EVw/PI - EVw/oPI

To calculate the EVw/PI, we need to consider the best decision given each possible state of nature. If the manager knows which state of nature will occur, then he would choose the decision that gives the highest expected value. For example, if the manager knows that the market conditions will be favorable, then he would choose to expand the large plant for a profit of $100,000. If he knows that the market conditions will be unfavorable, then he would choose not to expand for a profit of $5,000.

EVw/PI = (0.5 x $100,000) + (0.5 x $5,000) = $52,500

Thus, the EVPI is:

EVPI = $52,500 - $25,000 = $27,500

Therefore, the manager should be willing to pay up to $27,500 for perfect information, but since the answer choices do not include this option, the best choice is B) $25,000, which is the closest answer option.

Question 4

The maximax criterion of decision making requires that all decision alternatives have an equal probability of occurrence.

Accepted Answer

The maximax criterion does not require that all decision alternatives have an equal probability of occurrence. It simply seeks to identify the decision alternative that will lead to the maximum possible payoff, regardless of the probability of that outcome.

Question 5

What is a conditional value?

Accepted Answer

The answer of What is a conditional value?...

Question 6

If a decision maker has to make a particular decision only once,expected monetary value is a good indication of the payoff associated with the decision.

Accepted Answer

The answer of If a decision maker has to make...

Question 7

The expected value with perfect information assumes that all states of nature are equally likely.

Accepted Answer

The expected value with perfect information assumes that the decision maker knows the probability of each state of nature occurring. Therefore, it does not assume that all states of nature are equally likely.

Question 8

An example of expected monetary value would be the payoff from selecting a particular alternative when a particular state of nature occurs.

Accepted Answer

The answer of An example of expected monetary value would...

Question 9

A(n)________ is a tabular means of analyzing decision alternatives and states of nature.

Accepted Answer

The answer of A(n)________ is a tabular means of analyzing...

Question 10

Expected monetary value is most appropriate for problem solving that takes place:
A)when conditions are average.
B)when all states of nature are equally likely.
C)when all alternatives are equally likely.
D)under conditions of uncertainty.
E)under conditions of risk.

Accepted Answer

The answer of Expected monetary value is most appropriate for...

Question 11

A retailer is deciding how many units of a certain product to stock.The historical probability distribution of sales for this product is 0 units,0.2;1 unit,0.3;2 units,0.4,and 3 units,0.1.The product costs $8 per unit and sells for $25 per unit.What is the largest conditional value (profit)in the entire payoff table for this scenario?
A)$-24 profit
B)$-8 profit
C)$17 profit
D)$51 profit
E)$75 profit

Accepted Answer

The answer of A retailer is deciding how many units...

Question 12

A decision maker who uses the maximin criterion when solving a problem under conditions of uncertainty is:
A)an optimist.
B)a pessimist.
C)an economist.
D)an optometrist.
E)making a serious mistake;maximin is not appropriate for conditions of uncertainty.

Accepted Answer

The maximin criterion is a conservative decision rule that focuses on minimizing the maximum possible loss in the worst-case scenario. It is typically used by pessimistic decision makers who are more concerned with avoiding losses than maximizing gains, particularly when there is a lot of uncertainty or risk involved. Therefore, the best choice is B, a pessimist.

Question 13

What are decision tables?

Accepted Answer

The answer of What are decision tables?...

Question 14

If a decision maker can assign probabilities of occurrences to the states of nature,then the decision-making environment is Decision Making under Uncertainty.

Accepted Answer

When a decision maker can assign probabilities to the states of nature, the environment is referred to as Decision Making under Risk, not Uncertainty. In Decision Making under Uncertainty, probabilities are not known.

Question 15

The expected value with perfect information:
A)equals EVPI - Maximum EMV.
B)requires that each decision alternative have a known probability of occurrence.
C)is an input into the calculation of the expected value of perfect information.
D)is the average of the maximax and the maximin.
E)none of the above

Accepted Answer

The expected value with perfect information requires that the probabilities of each decision alternative be known, and is used as an input in the calculation of the expected value of perfect information. Options A, B, and D are not correct statements about the expected value with perfect information.

Question 16

There are three equally likely states of nature (High,Medium,and Low demand).If the large factory will post profits of $50,000,$25,000,and - $10,000 under these states of nature,respectively,what is the EMV of the factory?
A)$50,000
B)$25,000
C)$28,333.33
D)$21,666.67
E)$65,000

Accepted Answer

The answer of There are three equally likely states of...

Question 17

The expected value of perfect information is the same as the expected value with perfect information.

Accepted Answer

The expected value of perfect information (EVPI) measures the value of having perfect information before making a decision, while the expected value with perfect information (EVwPI) calculates the best possible outcome assuming perfect information is available. EVPI is the difference between EVwPI and the expected value without perfect information (EVwoPI).

Question 18

The maximin criterion is pessimistic,while the maximax criterion is optimistic.

Accepted Answer

The maximin criterion focuses on the worst possible outcome and chooses the option that maximizes the minimum possible result, which is a pessimistic approach. On the other hand, the maximax criterion looks at the best possible outcome and selects the option that maximizes it, which is an optimistic approach.

Question 19

What decision criterion would be used by an optimistic decision maker solving a problem under conditions of uncertainty?
A)expected monetary value
B)equally likely
C)maximax
D)maximin
E)minimin

Accepted Answer

An optimistic decision maker believes that the outcome will be favorable and therefore seeks to maximize the maximum possible outcome. The maximax decision criterion selects the alternative that has the highest possible payoff. This is the best choice for an optimistic decision maker under conditions of uncertainty because it maximizes the potential for a favorable outcome.

Question 20

The expected monetary value of a decision alternative is the sum of all possible payoffs from the alternative,each weighted by the probability of that payoff occurring.

Accepted Answer

This is the correct definition of expected monetary value.

Quiz 22: Decision Modeling