Deck 19: Introduction to Decision Analysis

Question 1

For each decision alternative there is only one payoff possible.

Answer 1

False

Question 2

Payoff refers to the net profit or loss resulting from a combination of alternative and state of nature.

Answer 2

True

Question 3

Probabilistic decision criteria are used when the probabilities associated with the possible payoffs are unknown.

Answer 3

False

Question 4

The complexity of a decision is affected by the number of alternatives,the number of possible outcomes,and the general level of uncertainty.

Question 5

Decision analysis is essential for all business decisions.

Question 6

Under certainty the outcome of each alternative is known before the decision made.

Question 7

Payoff and state of nature are two different terms for the same thing.

Question 8

The two primary decision environments are certainty and uncertainty.

Question 9

Good decisions always result in good outcomes.

Question 10

The more complex the decision the less useful decision analysis is.

Question 11

The goal of decision analysis is to focus on obtaining good outcomes.

Question 12

There are two main categories of decision criteria; nonprobabilistic and probabilistic.

Question 13

The maximax criterion is a nonprobabilistic decision criterion.

Question 14

Uncertainty in the decision environment is defined to mean the decision maker is uncertain which alternative to choose.

Question 15

When the outcome of a decision is bad this does not necessarily mean that the decision was bad.

Question 16

Most business decisions are made in an environment of certainty.

Question 17

A payoff table shows the payoff for each combination of alternative and state of nature.

Question 18

The possible outcomes of a decision,over which the decision maker has no control,are referred to as states of nature.

Question 19

In order to choose among two or more alternatives it is important to establish the decision criteria that will be used to evaluate each alternative.

Question 20

Decision analysis refers to a set of tools that can be helpful in analyzing business decisions.

Question 21

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Using the maximax criterion she should choose location 2.

Question 22

The minimax regret criterion can be thought of as; the decision maker is trying to minimize how much he/she might regret the decision that was made.

Question 23

When using the minimax regret criterion,after finding the opportunity loss table,the next step is to choose the minimum regret for each alternative.

Question 24

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Suppose that Julie estimates the following probabilities for each level of restaurant popularity. The expected value of Location 1 is 120.

Question 25

Expected value refers to the average outcome (payoff)that the decision maker would expect to receive over the long run if the decision is repeated many times.

Question 26

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. The opportunity loss for Location 1 and Good restaurant popularity is 150.

Question 27

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Suppose that Julie estimates the following probabilities for each level of restaurant popularity. The expected value of Location 2 is 310.

Question 28

Opportunity loss values are used by the maximax criterion.

Question 29

The maximax criterion,maximin criterion,minimax regret criterion,and expected value criterion are all nonprobabilistic decision criteria.

Question 30

Opportunity loss is the difference between the actual payoff that occurs for a decision and the optimal payoff for a given state of nature.

Question 31

The maximin criterion is an optimistic decision criterion.

Question 32

If the decision to be made is a one-time decision,the expected value method can be misleading because it represents the average outcome from repeating the decision many times.

Question 33

The expected value criterion is a probabilistic decision criterion because it involves probability values for each possible outcome.

Question 34

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. The opportunity loss for Location 2 and Poor restaurant popularity is 350.

Question 35

The first step in the minimax regret criterion is to construct the opportunity loss table.

Question 36

The term expected value refers to the exact value that the decision maker can expect to receive when a given alternative is chosen.

Question 37

Regret is another term for opportunity loss because it refers to how much a decision maker would regret having made a particular decision after the state of nature is known.

Question 38

Making decisions under certainty means that the state of nature is known prior to choosing an alternative so the optimal decision can be chosen which will produce the best outcome.

Question 39

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Using the maximin criterion she should choose location 2.

Question 40

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Using the minimax regret criterion,she should choose location 1.

Question 41

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. The opportunity loss for making a medium number of donuts (A₂)and demand being high (S₁)is 100.

Question 42

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. It estimates the following probabilities for the respective levels of demand. If the bakery had perfect information about that day's demand,the expected value of perfect information is 60.

Question 43

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. The opportunity loss for making a medium number of donuts (A₂)and demand being low (S₃)is 120.

Question 44

A payoff table and a decision tree both show the alternatives,states of nature,and payoffs,but the decision tree also shows the order of events.

Question 45

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. The opportunity loss for Location 2 and Poor restaurant popularity is 800.

Question 46

The "expected cost of uncertainty" and the "expected value of perfect information" are the same thing.

Question 47

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Suppose that Julie estimates the following probabilities for each level of restaurant popularity. The expected payoff or value under uncertainty is 190.

Question 48

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. It estimates the following probabilities for the respective levels of demand. If on a given day the bakery knew in advance that demand was going to be high,then the payoff that day would be 350.

Question 49

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. The opportunity loss for Location 1 and Poor restaurant popularity is 150.

Question 50

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. It estimates the following probabilities for the respective levels of demand. The expected value of A₃ (making many donuts)is 210.

Question 51

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. The opportunity loss for making many donuts (A₃)and demand being Moderate (S₂)is 200.

Question 52

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Suppose that Julie estimates the following probabilities for each level of restaurant popularity. If Julie had perfect information,the expected payoff under certainty is 310.

Question 53

Assume that a decision maker is facing a decision under uncertainty and has calculated the expected value of perfect information is 75.If the decision maker could obtain perfect information at a cost of 85,then he/she should purchase the perfect information.

Question 54

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. It estimates the following probabilities for the respective levels of demand. The expected value of A₂ (making a medium number of donuts)is 186.

Question 55

The expected value or payoff is lower in an uncertain environment than in a certain environment.

Question 56

The expected value of perfect information (EVPI)is the minimum amount a manager would expect to pay to obtain perfect information.

Question 57

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. It estimates the following probabilities for the respective levels of demand. If the bakery had perfect information about that day's demand,the expected value under certainty is 275.

Question 58

The expected value under certainty is equal to the difference between the expected value under uncertainty and the expected cost of uncertainty.

Question 59

A bakery makes fresh donuts every morning.If any are left at the end of the day they are donated to a homeless shelter.The number of donuts that can be sold each day is uncertain and the bakery must decide early each morning,how many donuts to make that day.The bakery has created the following payoff table to summarize the situation. It estimates the following probabilities for the respective levels of demand. The overall expected value or payoff of making this decision under uncertainty is 190.

Question 60

Julie is planning to open a restaurant and is considering two possible locations.She has estimated the payoff for each location for each of three different possible levels of restaurant popularity (state of nature)as shown below. Suppose that Julie estimates the following probabilities for each level of restaurant popularity. The expected value of perfect information is 70.

Question 61

In folding back a decision tree,one works from left to right.

Question 62

When is decision analysis most useful?

A)For decisions that are not complex
B)For decisions that are complex
C)For decision that affect only one functional area of an organization
D)For decisions that are made in an environment of certainty

Question 63

In conducting sensitivity analysis in a decision tree,the probability that is solved for is the value that would make one alternative much more preferable than the other alternative.

Question 64

Decision trees are helpful in visually structuring the problem and seeing all the possible sequences of events.

Question 65

A decision tree is shown below where the expected value of alternative 1 is known to be 400. After folding back the decision tree,you conclude that you should choose alternative 1 over alternative 2.

Question 66

In conducting sensitivity analysis for a probability in a decision tree,where there are only two alternatives,you solve to find the probability where the expected values of the two alternatives are equal to one another.

Question 67

Assume that you need to choose between two alternatives and know that the expected value for A₁ is 400,as shown in the decision tree below. You want to determine how sensitive the choice between the two alternatives is to the probability of S₁ occurring.In conducting sensitivity analysis on the probability of S₁,the probability value that you would find is p = 0.5.

Question 68

Assume that you have a riding lawn mower that is in need of repairs.You can choose to repair or replace it.You are interested in your net cost over the next two years.If you choose to repair,it will cost $300 and there is a 50/50 chance of whether or not it will need additional repairs within the next two years.If it does need additional repairs,there is a 40 percent chance of needing another $400 of repairs,and a 60 percent chance of needing another $200 of repairs.At the end of the two years you estimate that the repaired mower would be worthless.
If you choose to replace the mower by trading in the old mower,the cost after deducting the trade in value is $1500.At the end of the two years you estimate there is a 75 percent chance you could resell it for $1000,and a 25 percent chance that you can resell it for $1300.
After constructing the decision tree and folding it back you should choose to repair the mower because the expected value is a cost of $140.

Question 69

Assume that you have a riding lawn mower that is in need of repairs.You can choose to repair or replace it.You are interested in your net cost over the next two years.If you choose to repair,it will cost $300 and there is a 50/50 chance of whether or not it will need additional repairs within the next two years.If it does need additional repairs,there is a 40 percent chance of needing another $400 of repairs,and a 60 percent chance of needing another $200 of repairs.At the end of the two years you estimate that the repaired mower would be worthless.
If you choose to replace the mower by trading in the old mower,the cost after deducting the trade in value is $1500.At the end of the two years you estimate there is a 75 percent chance you could resell it for $1000,and a 25 percent chance that you can resell it for $1300.
After drawing the tree and folding back,the expected value of replacing the mower (by trading in)is a cost of $425.

Question 70

In using a decision tree,future decisions have no influence on the current decision.

Question 71

A decision tree can show only one decision and outcome combination.

Question 72

Which of the following is true regarding decision making environments?

A)Most business decisions are made in an environment of uncertainty.
B)Most business decisions are made in an environment of certainty.
C)Certainty means that probabilities of each possible outcome are known.
D)Uncertainty means that probabilities of each possible outcome are known.

Question 73

The goal of decision analysis is to:

A)always get the best possible outcome.
B)make good decisions that guarantee the best outcome.
C)use probabilistic criteria.
D)make good decisions that in the long run increase the number of good outcomes.

Question 74

Which of the following is not a factor affecting the complexity of a decision?

A)The number of alternatives
B)The number of possible outcomes
C)The values of the various payoffs
D)The general level of uncertainty

Question 75

To "fold back" the decision tree means to show the events and outcomes in the reverse order.

Question 76

In a decision tree,the decision maker can choose the desired branch at all branch points.

Question 77

In a decision tree the sum of all probabilities in the tree must be equal to 1.0.

Question 78

Sensitivity analysis for a decision tree involves analyzing how sensitive decisions are to the probability values used.

Question 79

At each branch point in a decision tree,where the decision maker does not have control,the probabilities must sum to 1.0.

Question 80

Assume that you have a riding lawn mower that is in need of repairs.You can choose to repair or replace it.You are interested in your net cost over the next two years.If you choose to repair,it will cost $300 and there is a 50/50 chance of whether or not it will need additional repairs within the next two years.If it does need additional repairs,there is a 40 percent chance of needing another $400 of repairs,and a 60 percent chance of needing another $200 of repairs.At the end of the two years you estimate that the repaired mower would be worthless.
If you choose to replace the mower by trading in the old mower,the cost after deducting the trade in value is $1500.At the end of the two years you estimate there is a 75 percent chance you could resell it for $1000,and a 25 percent chance that you can resell it for $1300.
After drawing out the decision tree from situation above,there will be a total of three branching points including the initial decision.