Deck 20: Decision Making

Question 1

SCENARIO 20-1
Referring to Scenario 20-1, the opportunity loss for A2 when S1 occurs is

A) - 2
B) 0
C) 5
D) 14

Answer 1

D

Question 2

A medical doctor is involved in a $1 million malpractice suit.He can either settle out of court for
$250,000 or go to court.If he goes to court and loses, he must pay $825,000 plus $175,000 in court
Costs.If he wins in court the plaintiffs pay the court costs.Identify the actions of this decision-making
Problem.

A) Two choices: (1) go to court and (2) settle out of court.
B) Two possibilities: (1) win the case in court and (2) lose the case in court.
C) Four consequences resulting from Go/Settle and Win/Lose combinations.
D) The amount of money paid by the doctor.

Answer 2

A

Question 3

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, what is the optimal alternative using EMV?

A) A1
B) A2
C) A3
D) It cannot be determined.

Answer 3

A

Question 4

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.2 and S2 is 0.8, then the expected opportunity
Loss (EOL)for A1 is

A) 0
B) 1.2
C) 4.8
D) 5.6

Question 5

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected monetary value (EMV )
For A2 is

A) 3
B) 4
C) 6.5
D) 8

Question 6

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected opportunity loss (EOL)
For A1 is

A) 3
B) 4.5
C) 7
D) 8

Question 7

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.4, then the probability of S2 is

A) 0.4
B) 0.5
C) 0.6
D) 1.0

Question 8

The difference between expected payoff under certainty and expected value of the best act without
Certainty is the:

A) expected monetary value.
B) expected net present value.
C) expected value of perfect information.
D) expected rate of return.

Question 9

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

A) a payback period matrix.
B) a decision matrix.
C) a decision tree.
D) a payoff table.

Question 10

A medical doctor is involved in a $1 million malpractice suit.He can either settle out of court for
$250,000 or go to court.If he goes to court and loses, he must pay $825,000 plus $175,000 in court
Costs.If he wins in court the plaintiffs pay the court costs.Identify the outcomes of this decision-
Making problem.

A) Two choices: (1) go to court and (2) settle out of court.
B) Two possibilities: (1) win the case in court and (2) lose the case in court.
C) Four consequences resulting from Go/Settle and Win/Lose combinations.
D) The amount of money paid by the doctor.

Question 11

A company that manufactures designer jeans is contemplating whether to increase its advertising
Budget by $1 million for next year.If the expanded advertising campaign is successful, the company
Expects sales to increase by $1.6 million next year.If the advertising campaign fails, the company
Expects sales to increase by only $400,000 next year.If the advertising budget is not increased, the
Company expects sales to increase by $200,000.Identify the outcomes in this decision-making
Problem.

A) Two choices: (1) increase the budget and (2) do not increase the budget.
B) Two possibilities: (1) campaign is successful and (2) campaign is not successful.
C) Four consequences resulting from the Increase/Do Not Increase and Successful/Not Successful combinations.
D) The increase in sales dollars next year.

Question 12

A medical doctor is involved in a $1 million malpractice suit.He can either settle out of court for
$250,000 or go to court.If he goes to court and loses, he must pay $825,000 plus $175,000 in court
Costs.If he wins in court the plaintiffs pay the court costs.Identify the states of nature of this
Decision-making problem.

A) Two choices: (1) go to court and (2) settle out of court.
B) Two possibilities: (1) win the case in court and (2) lose the case in court.
C) Four consequences resulting from Go/Settle and Win/Lose combinations.
D) The amount of money paid by the doctor.

Question 13

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected monetary value (EMV )
For A1 is

A) 3
B) 4
C) 6.5
D) 8

Question 14

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.2 and S2 is 0.8, then the expected monetary
Value of A1 is

A) 2.4
B) 5.6
C) 8
D) 16

Question 15

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.2, what is the optimal alternative using EOL?

A) A1.
B) A2.
C) A3.
D) It cannot be determined.

Question 16

A company that manufactures designer jeans is contemplating whether to increase its advertising
Budget by $1 million for next year.If the expanded advertising campaign is successful, the company
Expects sales to increase by $1.6 million next year.If the advertising campaign fails, the company
Expects sales to increase by only $400,000 next year.If the advertising budget is not increased, the
Company expects sales to increase by $200,000.Identify the payoffs in this decision-making problem.

A) Two choices: (1) increase the budget and (2) do not increase the budget.
B) Two possibilities: (1) campaign is successful and (2) campaign is not successful.
C) Four consequences resulting from the Increase/Do Not Increase and Successful/Not Successful combinations.
D) The increase in sales dollars next year.

Question 17

A company that manufactures designer jeans is contemplating whether to increase its advertising
Budget by $1 million for next year.If the expanded advertising campaign is successful, the company
Expects sales to increase by $1.6 million next year.If the advertising campaign fails, the company
Expects sales to increase by only $400,000 next year.If the advertising budget is not increased, the
Company expects sales to increase by $200,000.Identify the events in this decision-making problem.

A) Two choices: (1) increase the budget and (2) do not increase the budget.
B) Two possibilities: (1) campaign is successful and (2) campaign is not successful.
C) Four consequences resulting from the Increase/Do Not Increase and Successful/Not Successful combinations.
D) The increase in sales dollars next year.

Question 18

A company that manufactures designer jeans is contemplating whether to increase its advertising
Budget by $1 million for next year.If the expanded advertising campaign is successful, the company
Expects sales to increase by $1.6 million next year.If the advertising campaign fails, the company
Expects sales to increase by only $400,000 next year.If the advertising budget is not increased, the
Company expects sales to increase by $200,000.Identify the actions in this decision-making problem.

A) Two choices: (1) increase the budget and (2) do not increase the budget.
B) Two possibilities: (1) campaign is successful and (2) campaign is not successful.
C) Four consequences resulting from the Increase/Do Not Increase and Successful/Not Successful combinations.
D) The increase in sales dollars next year.

Question 19

SCENARIO 20-1
Referring to Scenario 20-1, the opportunity loss for A3 when S2 occurs is

A) 0
B) 4
C) 5
D) 6

Question 20

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected opportunity loss (EOL)
For A3 is

A) 3
B) 4.5
C) 7
D) 8

Question 21

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
Respectively, then the EOL for buying 200 dozen roses is

A) $700
B) $900
C) $1,500
D) $1,600

Question 22

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.If the probability of selling 100 dozen roses is 0.2 and 200 dozen roses is 0.5, then the
Probability of selling 400 dozen roses is

A) 0.7
B) 0.5
C) 0.3
D) 0.2

Question 23

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the coefficient of variation for A2 is

A) 0.231
B) 0.5
C) 1.5
D) 2

Question 24

SCENARIO 20-1
Referring to Scenario 20-1, what is the best action using the maximin criterion?

A) Action A1
B) Action A2
C) Action A3
D) It cannot be determined.

Question 25

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.The number of alternatives for the payoff table is

A) 2
B) 3
C) 4
D) It cannot be determined.

Question 26

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
Respectively, then the optimal EMV for buying roses is

A) $700
B) $900
C) $1,700
D) $1,900

Question 27

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.The opportunity loss for buying 200 dozen roses and selling 100 dozen roses at the full price is

A) $1,000
B) $500
C) - $500
D) - $2,000

Question 28

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the return to risk ratio for A1 is

A) 0.667
B) 1.5
C) 2
D) 4.333

Question 29

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected profit under certainty
(EPUC )is

A) 3
B) 5
C) 8
D) 11

Question 30

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the return to risk ratio for A3 is

A) 0.667
B) 1.5
C) 2
D) 4.333

Question 31

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.The payoff for buying 200 dozen roses and selling 100 dozen roses at the full price is

A) $2,000
B) $1,000
C) $500
D) - $500

Question 32

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
Respectively, then the optimal EOL for buying roses is

A) $700
B) $900
C) $1,500
D) $1,600

Question 33

SCENARIO 20-1
Referring to Scenario 20-1, what is the best action using the maximax criterion?

A) Action A1
B) Action A2
C) Action A3
D) It cannot be determined.

Question 34

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.The payoff for buying and selling 400 dozen roses at the full price is

A) $12,000
B) $6,000
C) $4,000
D) It cannot be determined.

Question 35

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
Respectively, then the EMV for buying 200 dozen roses is

A) $4,500
B) $2,500
C) $1,700
D) $1,000

Question 36

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the EVPI for the payoff table is

A) - 3
B) 3
C) 8
D) 11

Question 37

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.The opportunity loss for buying 400 dozen roses and selling 200 dozen roses at the full price is

A) - $2,000
B) $1,000
C) $500
D) $0

Question 38

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.The number of states of nature for the payoff table is

A) 2
B) 3
C) 4
D) It cannot be determined.

Question 39

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
Respectively, then the optimal alternative using EMV for selling roses is to buy dozen
Roses.

A) 100
B) 200
C) 400
D) 600

Question 40

SCENARIO 20-1
Referring to Scenario 20-1, if the probability of S1 is 0.5, then the coefficient of variation for A1 is

A) 0.231
B) 0.5
C) 1.5
D) 2

Question 41

SCENARIO 20-2
Referring to Scenario 20-2, the EVPI is

A) 0
B) 300
C) 400
D) 600

Question 42

For a potential investment of $5,000, a portfolio has an EMV of $1,000 and a standard deviation of
$100.The return to risk ratio is

A) 50
B) 20
C) 10
D) 5

Question 43

SCENARIO 20-2
Referring to Scenario 20-2, what is the action with the preferable return to risk ratio?

A) Action A
B) Action B
C) Either Action A or Action B
D) It cannot be determined.

Question 44

Blossom's Flowers purchases roses for sale for Valentine's Day.The roses are purchased for $10 a
Dozen and are sold for $20 a dozen.Any roses not sold on Valentine's Day can be sold for $5 per
Dozen.The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen
Roses.Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
Respectively, then the EVPI for buying roses is

A) $700
B) $1,500
C) $1,900
D) $2,600

Question 45

For a potential investment of $5,000, a portfolio has an EMV of $1,000 and a standard deviation of
$100.What is the coefficient of variation?

A) 10%
B) 20%
C) 50%
D) 100%

Question 46

SCENARIO 20-2
Referring to Scenario 20-2, what is the optimal action using the EMV criterion?

A) Action A
B) Action B
C) Either Action A or Action B
D) It cannot be determined.

Question 47

The minimum expected opportunity loss is also equal to

A)expected profit under certainty.
B)expected value of perfect information.
C)coefficient of variation.
D)expected value under certainty minus the expected monetary value of the worst
Alternative.

Question 48

SCENARIO 20-3
Referring to Scenario 20-3, which investment has the optimal return to risk ratio?

A) Investment A
B) Investment B
C) The investments are equal.
D) It cannot be determined.

Question 49

SCENARIO 20-2
Referring to Scenario 20-2, the return to risk ratio for Action B is

A) 0.167
B) 3.0
C) 6.0
D) 9.0

Question 50

SCENARIO 20-2
Referring to Scenario 20-2, what is the action with the preferable coefficient of variation?

A) Action A
B) Action B
C) Either Action A or Action B
D) It cannot be determined.

Question 51

SCENARIO 20-2
Referring to Scenario 20-2, the coefficient of variation for Action A is

A) 12.8%
B) 33.3%
C) 133.33%
D) 333.3%

Question 52

SCENARIO 20-2
Referring to Scenario 20-2, the EOL for Action A is

A) 0
B) 100
C) 200
D) 300

Question 53

SCENARIO 20-2
Referring to Scenario 20-2, what is the best action using the maximax criterion?

A) Action A
B) Action B
C) Either Action A or Action B
D) It cannot be determined.

Question 54

SCENARIO 20-2
Referring to Scenario 20-2, what is the best action using the maximin criterion?

A) Action A
B) Action B
C) Either Action A or Action B
D) It cannot be determined.

Question 55

SCENARIO 20-2
Referring to Scenario 20-2, the EMV for Action A is

A) $300
B) $550
C) $600
D) $700

Question 56

SCENARIO 20-3
Referring to Scenario 20-3, which investment has the optimal coefficient of variation?

A) Investment A
B) Investment B
C) The investments are equal.
D) It cannot be determined.

Question 57

For a potential investment of $5,000, a portfolio has an EMV of $1,000 and a standard deviation of
$100.What is the rate of return?

A) 5%
B) 10%
C) 20%
D) 50%

Question 58

SCENARIO 20-2
Referring to Scenario 20-2, the expected profit under certainty (EPUC )is

A) 0
B) 300
C) 500
D) 600

Question 59

SCENARIO 20-2
Referring to Scenario 20-2, what is the optimal action using the EOL criterion?

A) Action A
B) Action B
C) Either Action A or Action B
D) It cannot be determined.

Question 60

SCENARIO 20-3
Referring to Scenario 20-3, what is the coefficient of variation for investment A?

A) 90.0%
B) 11.1%
C) 8.3%
D) 5.0%

Question 61

At Eastern University, 60% of the students are from suburban areas, 30% are from rural areas, and
10% are from urban areas.Of the students from the suburban areas, 60% are nonbusiness majors.Of
The students from the rural areas, 70% are nonbusiness majors.Of the students from the urban areas,
90% are nonbusiness majors.If a randomly selected student is not a business major, the probability
That the student is from the urban area is

A) 0.136
B) 0.214
C) 0.666
D) 0.706

Question 62

In a local cellular phone area, company A accounts for 60% of the cellular phone market, while
Company B accounts for the remaining 40% of the market.Of the cellular calls made with company
A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B
Will have interference.If a cellular call is selected at random, the probability that it will not have
Interference is

A) 0.014
B) 0.028
C) 0.14
D) 0.986

Question 63

At Eastern University, 60% of the students are from suburban areas, 30% are from rural areas, and
10% are from urban areas.Of the students from the suburban areas, 60% are nonbusiness majors.Of
The students from the rural areas, 70% are nonbusiness majors.Of the students from the urban areas,
90% are nonbusiness majors.The probability that a randomly selected student is a business major is

A) 0.66
B) 0.54
C) 0.44
D) 0.34

Question 64

SCENARIO 20-4
Referring to Scenario 20-4, what is the standard deviation?

A) 4,890
B) 4,840
C) 124.9
D) 69.6

Question 65

True or False: To calculate expected profit under certainty, you need to have perfect information
about which event will occur.

Question 66

Look at the utility function graphed below and select the type of decision maker that corresponds to
The graph.

A) Risk averter
B) Risk neutral
C) Risk taker
D) Risk player

Question 67

_________ is a procedure for revising probabilities based upon additional information.

A) Utility theory
B) Bernoulli's theorem
C) Beckman's theorem
D) Bayes' theorem

Question 68

Look at the utility function graphed below and select the type of decision maker that corresponds to
The graph.

A) Risk averter
B) Risk neutral
C) Risk taker
D) Risk player

Question 69

Look at the utility function graphed below and select the type of decision-maker that corresponds to
The graph.

A) Risk averter
B) Risk neutral
C) Risk taker
D) Risk player

Question 70

True or False: Opportunity loss is the difference between the lowest profit for an event and the actual
profit obtained for an action taken.

Question 71

The curve for the will show a rapid increase in utility for initial amounts of money
Followed by a gradual leveling off for increasing dollar amounts.

A) risk taker
B) risk averter
C) risk neutral
D) profit seeker

Question 72

SCENARIO 20-4
Referring to Scenario 20-4, what is the coefficient of variation?

A) 88.8%
B) 90.3%
C) 100%
D) 156.1%

Question 73

SCENARIO 20-4
Referring to Scenario 20-4, what is the EMV?

A) $180
B) $130
C) $90
D) $80

Question 74

SCENARIO 20-3
Referring to Scenario 20-3, what is the return to risk ratio for Investment B?

A) 8
B) 10
C) 12
D) 24

Question 75

In a local cellular phone area, company A accounts for 60% of the cellular phone market, while
Company B accounts for the remaining 40% of the market.Of the cellular calls made with company
A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B
Will have interference.If a cellular call is selected at random and has interference, what is the
Probability that it was with company A?

A) 0.071
B) 0.429
C) 0.571
D) It cannot be determined.

Question 76

The risk seeker's curve represents the utility of one who enjoys taking risks.Therefore, the slope of
The utility curve becomes for large dollar amounts.

A) smaller
B) stable
C) larger
D) uncertain

Question 77

SCENARIO 20-4
Referring to Scenario 20-4, what is the return to risk ratio?

A) 0.64
B) 1.08
C) 1.18
D) 2.00

Question 78

True or False: Removal of uncertainty from a decision-making problem leads to a case referred to as
perfect information.

Question 79

The curve represents the expected monetary value approach.

A) risk averter's
B) risk taker's
C) risk neutral
D) Bernoulli

Question 80

In a local cellular phone area, company A accounts for 60% of the cellular phone market, while
Company B accounts for the remaining 40% of the market.Of the cellular calls made with company
A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B
Will have interference.If a cellular call is selected at random, the probability that it will have
Interference is

A) 0.014
B) 0.028
C) 0.14
D) 0.986