Question 1

The maximin criterion is preferred by optimistic decision makers.

Accepted Answer

Maximin is considered a pessimistic approach; maximax is preferred by optimistic decision makers.

Question 2

The maximin criterion finds the best possible payoff for each alternative and then chooses the alternative that yields the maximum payoff.

Accepted Answer

Maximin finds the maximum of the worst possible payoffs; maximax finds the maximum of the best possible payoffs.

Question 3

Maximin is a criterion used when making decisions under certainty.

Accepted Answer

Maximin is used when making decisions under uncertainty.

Question 4

Maximax is a criterion used when making decisions under uncertainty.

Accepted Answer

Maximax is a criterion used when making decisions under uncertainty.

Question 5

When making a decision in an environment of ________, the decision maker knows which of the states of nature will actually occur.

Accepted Answer

When making a decision in an environment of certainty, the decision maker knows which of the states of nature will actually occur.

Question 6

When making a decision in an environment of ________, the likelihood of each state of nature can be estimated.

Accepted Answer

When making a decision in an environment of risk, the likelihood of each state of nature can be estimated.

Question 7

The ________ is the difference between the expected payoff that would be realized if the best alternative action were selected if we knew which state of nature would occur and the expected payoff under risk.

Accepted Answer

The expected value of perfect information is the difference between the expected payoff that would be realized if the best alternative action were selected if we knew which state of nature would occur and the expected payoff under risk.

Question 8

The maximax criterion is preferred by pessimistic decision makers.

Accepted Answer

Maximax is an optimistic approach.

Question 9

A decision maker's expected utility is based upon his/her attitude toward risk.

Accepted Answer

A decision maker's expected utility is based upon his/her attitude toward risk.

Question 10

The expected monetary value criterion is best used when a large number of similar decisions will be made.

Accepted Answer

The expected monetary value criterion is best used when a large number of similar decisions will be made.

Question 11

The maximax criterion finds the worst possible payoff for each alternative and then chooses the alternative that yields the maximum of those worst possible payoffs.

Accepted Answer

Maximin finds the maximum of the worst possible payoffs; maximax finds the maximum of the best possible payoffs.

Question 12

If the decision maker has no knowledge about the likelihood of any of the states of nature occurring, then it can be stated that the decision maker is operating in an environment of

Accepted Answer

If the decision maker has no knowledge about the likelihood of any of the states of nature occurring, then it can be stated that the decision maker is operating in an environment of uncertainty.

Question 13

The maximax criterion finds the best possible payoff for each alternative and then chooses the alternative that yields the maximum (best) possible payoff.

Accepted Answer

The maximax criterion finds the best possible payoff for each alternative and then chooses the alternative that yields the maximum (best) possible payoff.

Question 14

A tire manufacturer needs to choose the production level for the coming month (high vs. low). The level of production largely depends on the level of demand. For this situation, the level of demand (high, medium, low) is the state of nature.

Accepted Answer

States of nature is the set of potential future conditions that will have an effect on the results of a decision. The level of demand will have an impact on level of production. Thus, the level of demand is the state of nature.

Question 15

Alternatives 1 and 2 in the following payoff table represent the two possible manufacturing strategies that the EKA manufacturing company can adopt. The level of demand affects the success of both strategies. The states of nature (S_I) represent the levels of demand for the company products. S₁, S₂, and S₃ characterize high, medium, and low demand, respectively. The payoff values are in thousands of dollars. The best alternative (course of action) for the EKA manufacturing company, using the maximax criterion, is alternative 1.

Accepted Answer

Using the maximax criterion, the alternative strategy that would be chosen is 2 because the state of nature 2 has the best possible payoff.

Question 16

In utility analysis, a utility curve that shows a rapid increase in utility for initial amounts of money followed by a gradual leveling off for larger amounts of money is appropriate for a risk-seeking decision maker.

Accepted Answer

The description of the utility curve is a risk averter's curve, not a risk seeker's curve, which would have a slow increase in utility for initial amounts of money followed by a rapid increase.

Question 17

When we use the expected monetary value criterion, the expected payoff equals the actual payoff that will be realized.

Accepted Answer

Under the expected monetary value criterion, the expected monetary payoff is the largest expected payoff, not the actual.

Question 18

A set of potential future conditions that will have an effect on the results of a decision is called the states of nature.

Accepted Answer

States of nature is the set of potential future conditions that will have an effect on the results of a decision.

Question 19

Maximin is a criterion used when making decisions under ________.

Accepted Answer

Maximin is a criterion used when making decisions under uncertainty.

Question 20

When the maximin criterion is used, the decision maker assumes that for any alternative action, the state of nature with the maximum payoff will take place.

Accepted Answer

The maximin criterion assures a "guaranteed minimum" payoff.

Quiz 19: Decision Theory

The maximin criterion is preferred by optimistic decision makers.

The maximin criterion finds the best possible payoff for each alternative and then chooses the alternative that yields the maximum payoff.

Maximin is a criterion used when making decisions under certainty.

Maximax is a criterion used when making decisions under uncertainty.

When making a decision in an environment of ________, the decision maker knows which of the states of nature will actually occur.

When making a decision in an environment of ________, the likelihood of each state of nature can be estimated.

The ________ is the difference between the expected payoff that would be realized if the best alternative action were selected if we knew which state of nature would occur and the expected payoff under risk.

The maximax criterion is preferred by pessimistic decision makers.

A decision maker's expected utility is based upon his/her attitude toward risk.

The expected monetary value criterion is best used when a large number of similar decisions will be made.

The maximax criterion finds the worst possible payoff for each alternative and then chooses the alternative that yields the maximum of those worst possible payoffs.

If the decision maker has no knowledge about the likelihood of any of the states of nature occurring, then it can be stated that the decision maker is operating in an environment of

The maximax criterion finds the best possible payoff for each alternative and then chooses the alternative that yields the maximum (best) possible payoff.

A tire manufacturer needs to choose the production level for the coming month (high vs. low). The level of production largely depends on the level of demand. For this situation, the level of demand (high, medium, low) is the state of nature.

In utility analysis, a utility curve that shows a rapid increase in utility for initial amounts of money followed by a gradual leveling off for larger amounts of money is appropriate for a risk-seeking decision maker.

When we use the expected monetary value criterion, the expected payoff equals the actual payoff that will be realized.

A set of potential future conditions that will have an effect on the results of a decision is called the states of nature.

Maximin is a criterion used when making decisions under ________.

When the maximin criterion is used, the decision maker assumes that for any alternative action, the state of nature with the maximum payoff will take place.