# Quiz 14: Decision Analysis

Statistics

Q 1Q 1

Decision analysis supports all but one of the following goals. Which goal is not supported?
A) Help make good decisions.
B) Help ensure selection of good outcomes.
C) Analyze decision problems logically.
D) Incorporate problem uncertainty.

Free

Multiple Choice

B

Q 2Q 2

Although modeling provides valuable insight to decision makers, decision making remains a difficult task. Which of the following is not a primary cause for this difficulty discussed in the Decision Analysis chapter?
A) Uncertainty regarding the future.
B) Models provide decisions for the decision maker.
C) Conflicting values.
D) Conflicting objectives.

Free

Multiple Choice

B

Q 3Q 3

A course of action intended to solve a problem is called a(n)
A) alternative.
B) option.
C) decision.
D) criteria.

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Multiple Choice

A

Q 4Q 4

Decision Analysis techniques provide modeling techniques to help decision makers make decisions. Which of the following is not typically a benefit of decision analysis?
A) Incorporating uncertainty via probabilities.
B) Incorporating risk via utility theory functions.
C) Incorporating uncertainty via exponential distributions.
D) Structuring decision strategies via decision trees.

Free

Multiple Choice

Q 5Q 5

Which of the following is a goal of decision analysis?
A) Help individuals make good decisions.
B) Ensure decisions lead to good outcomes.
C) Avoiding decisions leading to bad outcomes.
D) Reduce the role of luck in a decision.

Free

Multiple Choice

Q 6Q 6

The ____ in a decision problem represent factors that are important to the decision maker.
A) payoffs
B) states of nature
C) criteria
D) alternatives

Free

Multiple Choice

Q 7Q 7

The ____ correspond to future events that are not under the control of the decision maker.
A) payoffs
B) states of nature
C) criteria
D) alternatives

Free

Multiple Choice

Q 8Q 8

A(n) ____ is a course of action intended to solve a problem.
A) decision
B) criteria
C) state of nature
D) alternative

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Multiple Choice

Q 9Q 9

A payoff matrix depicts ____ versus ____ with payoffs for each intersection cell.
A) decision criteria; states of nature.
B) decision alternatives; potential outcomes.
C) decision alternatives; states of nature.
D) decision criteria; potential outcomes.

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Multiple Choice

Q 10Q 10

Which of the following summarizes the final outcome for each decision alternative?
A) payoff matrix
B) outcome matrix
C) yield matrix
D) performance matrix

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Multiple Choice

Q 11Q 11

The decision rule which determines the maximum payoff for each alternative and then selects the alternative associated with the largest payoff is the
A) maximax decision rule.
B) maximin decision rule.
C) minimax regret decision rule.
D) minimin decision rule.

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Multiple Choice

Q 12Q 12

Which decision rule optimistically assumes that nature will always be "on our side" regardless of what decision we make?
A) maximax decision rule.
B) maximin decision rule.
C) minimax regret decision rule.
D) minimin decision rule.

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Multiple Choice

Q 13Q 13

Which decision rule pessimistically assumes that nature will always be "against us" regardless of what decision we make?
A) maximax decision rule.
B) maximin decision rule.
C) minimax regret decision rule.
D) minimin decision rule.

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Multiple Choice

Q 14Q 14

The decision rule which determines the minimum payoff for each alternative and then selects the alternative associated with the largest minimum payoff is the
A) maximax decision rule.
B) maximin decision rule.
C) minimax regret decision rule.
D) minimin decision rule.

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Multiple Choice

Q 15Q 15

Every nonprobabilistic method has a weakness for decision making. Which of the following is incorrect regarding a method and its weakness?
A) The maximax method ignores potentially large losses.
B) The maximin method ignores potentially large payoffs.
C) The minimax regret method can lead to inconsistent decisions.
D) All of these are correct.

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Multiple Choice

Q 16Q 16

The category of decision rules that contains the maximax decision rule is the
A) optimistic category.
B) non-probabilistic category.
C) probabilistic category.
D) optimality category.

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Multiple Choice

Q 17Q 17

The amount of opportunity lost in making a decision is called
A) loss.
B) frustration.
C) negative profit.
D) regret.

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Multiple Choice

Q 18Q 18

The decision rule which selects the alternative associated with the smallest maximum opportunity loss is the
A) maximax decision rule.
B) maximin decision rule.
C) minimax regret decision rule.
D) minimin decision rule.

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Multiple Choice

Q 19Q 19

How are states of nature assigned probabilities?
A) Use historical data.
B) Use best judgements.
C) Use interview results.
D) All of these.

Free

Multiple Choice

Q 20Q 20

Exhibit 14.1
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Refer to Exhibit 14.1. What decision should be made according to the maximax decision rule?
A) A
B) B
C) C
D) Bank

Free

Multiple Choice

Q 21Q 21

Exhibit 14.1
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Refer to Exhibit 14.1. What decision should be made according to the maximin decision rule?
A) A
B) B
C) C
D) Bank

Free

Multiple Choice

Q 22Q 22

Exhibit 14.1
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Refer to Exhibit 14.1. What decision should be made according to the minimax regret decision rule?
A) A
B) B
C) C
D) Bank

Free

Multiple Choice

Q 23Q 23

Exhibit 14.1
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Refer to Exhibit 14.1. What formula should go in cell D5 to implement the maximax decision rule?
A) =MAX(MAX(B5:C5))
B) =MIN(B5:C5)
C) =AVERAGE(B5:C5)
D) =MAX(B5:C5)

Free

Multiple Choice

Q 24Q 24

Exhibit 14.1
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Refer to Exhibit 14.1. What formula should go in cell D5 to implement the maximin decision rule?
A) =MAX(MIN(B5:C5))
B) =MIN(B5:C5)
C) =AVERAGE(B5:C5)
D) =MAX(B5:C5)

Free

Multiple Choice

Q 25Q 25

Exhibit 14.1
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Probabilistic decision rules can be used if the states of nature in a decision problem can be assigned probabilities that represent their likelihood of occurrence. Which of the following is not true regarding the probabilities employed?
A) The probabilities are always obtained from historical data.
B) The probabilities must always be unbiased.
C) The probabilities can be assigned subjectively.
D) Subjective probabilities obtained can be accurate and unbiased.

Free

Multiple Choice

Q 26Q 26

Exhibit 14.2
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Refer to Exhibit 14.2. What formula should go in cell F5 of the Regret Matrix above to compute the regret value?
A) =B$5-MAX(B$5:B$8)
B) =MAX(B$5:B$8)-MAX(B5)
C) =MAX(B$5:B$8)-MIN(B$5:B$8)
D) =MAX(B$5:B$8)-B5

Free

Multiple Choice

Q 27Q 27

Exhibit 14.2
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem.
-Refer to Exhibit 14.2. What formula should go in cell H5 and copied to H6:H8 of the Regret Table above to implement the minimax regret decision rule?
A) =MAX(MAX(F5:G5))
B) =MIN(F5:G5)
C) =AVERAGE(F5:G5)
D) =MAX(F5:G5)

Free

Multiple Choice

Q 28Q 28

The decision with the smallest expected opportunity loss (EOL) will also have the
A) smallest EMV.
B) largest EMV.
C) smallest regret.
D) largest regret.

Free

Multiple Choice

Free

Multiple Choice

Q 30Q 30

The minimum EOL in a decision problem will always
A) exceed the EVPI.
B) be less than the EVPI.
C) equal the EVPI.
D) equal the EMV.

Free

Multiple Choice

Q 31Q 31

Exhibit 14.3
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%.
-Refer to Exhibit 14.3. What decision should be made according to the expected monetary value decision rule?
A) A
B) B
C) C
D) Bank

Free

Multiple Choice

Q 32Q 32

Exhibit 14.3
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%.
-Refer to Exhibit 14.3. What is the expected monetary value of Investment A?
A)34.
B)30.
C)20.
D) 15.

Free

Multiple Choice

Q 33Q 33

Exhibit 14.3
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%.
-Refer to Exhibit 14.3. What formula should go in cell F5 and copied to F6:F8 of the spreadsheet if the expected regret decision rule is to be used?
A) =B$5-MAX(B$5:B$8)
B) =MAX(B$5:B$8)-MAX(B5)
C) =MAX(B$5:B$8)-MIN(B$5:B$8)
D) =MAX(B$5:B$8)-B5

Free

Multiple Choice

Q 34Q 34

Exhibit 14.3
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%.
-Refer to Exhibit 14.3. What decision should be made according to the expected regret decision rule?
A) A
B) B
C) C
D) Bank

Free

Multiple Choice

Q 35Q 35

Exhibit 14.4
The following questions are based on the information below.
-Refer to Exhibit 14.4. What is the expected value of perfect information for the investor?
A) 13.5
B) 20
C) 45.5
D) 59

Free

Multiple Choice

Q 36Q 36

Exhibit 14.4
The following questions are based on the information below.
-Refer to Exhibit 14.4. What is the expected value with perfect information for the investor?
A) 13.5
B) 45.5
C) 59
D) 80

Free

Multiple Choice

Q 37Q 37

Exhibit 14.4
The following questions are based on the information below.
-Refer to Exhibit 14.4. What formula should go in cell D14 of the spreadsheet to compute the EVPI?
A) MAX(D5:D8)-D12
B) D12-MIN(D5:D8)
C) SUMPRODUCT(B12:C12,B10:C10)-MAX(D5:D8)
D) D12-MAX(D5:D8)

Free

Multiple Choice

Q 38Q 38

A square node in a decision tree is called a(n) ____ node.
A) chance
B) random
C) decision
D) event

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Multiple Choice

Q 39Q 39

A circular node in a decision tree is called a(n) ____ node.
A) chance
B) random
C) decision
D) event

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Multiple Choice

Q 40Q 40

Leaves of a decision tree are also called ____ nodes.
A) end
B) terminal
C) decision
D) payoff

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Multiple Choice

Q 41Q 41

Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%.
-Refer to Exhibit 14.5. What is the correct decision for this investor based on an expected monetary value criteria?
A) A
B) B
C) C
D) D

Free

Multiple Choice

Q 42Q 42

Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%.
-Refer to Exhibit 14.5. What is the expected monetary value for the investor's problem?
A) 32
B) 36
C) 38
D) 42

Free

Multiple Choice

Q 43Q 43

Exhibit 14.5
The following questions are based on the information below.
An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%.
-Refer to Exhibit 14.5. How high can P(E) go before the investor's decision, based on expected monetary value criteria, changes?
A) 0.65
B) 0.70
C) 0.75
D) 0.80

Free

Multiple Choice

Q 44Q 44

An investor is considering 2 investments, A, B, which can be made now. After these investments are made he can pursue choices C, D, E and F depending on whether he chose A or B originally. He has developed the following decision tree to aid in his selection process. What are the correct original and subsequent decisions based on an expected monetary value criteria?
A) A, C
B) A, D
C) B, E
D) B, F

Free

Multiple Choice

Q 45Q 45

A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 69% chance that demand for their products will be high and a 31% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 63% chance that the customers will like the products and a 37% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is a 92% chance that demand will be high for the products. If the survey is unfavorable there is only a 30% chance that the demand will be high. The following decision tree has been built for this problem. The company has computed that the expected monetary value of the best decision without sample information is 154.35 million. What is the EVSI for this problem (in $ million)?
A) 0.07
B) 26.38
C) 109.5
D) 180.8

Free

Multiple Choice

Q 46Q 46

The total worth, value or desirability of a decision alternative is called its
A) usefulness.
B) worthiness.
C) utility.
D) risk.

Free

Multiple Choice

Q 47Q 47

A "risk averse" decision maker assigns the ____ relative utility to any payoff but has a(n) ____ marginal utility for increased payoffs.
A) largest; increasing
B) largest; diminishing
C) smallest; diminishing
D) smallest; increasing

Free

Multiple Choice

Q 48Q 48

Exhibit 14.6
The following questions use the information below.
A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 69% chance that demand for their products will be high and a 31% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 63% chance that the customers will like the products and a 37% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is a 92% chance that demand will be high for the products. If the survey is unfavorable there is only a 30% chance that the demand will be high. The following decision tree has been built for this problem. The company has computed that the expected monetary value of the best decision without sample information is 154.35 million. The company has developed the following conditional probability table for their decision problem.
-Refer to Exhibit 14.6. What is P(FH), where F = favorable response and H = high demand?
A) .58
B) .63
C) .84
D) .92

Free

Multiple Choice

Q 49Q 49

Exhibit 14.6
The following questions use the information below.
A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 69% chance that demand for their products will be high and a 31% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 63% chance that the customers will like the products and a 37% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is a 92% chance that demand will be high for the products. If the survey is unfavorable there is only a 30% chance that the demand will be high. The following decision tree has been built for this problem. The company has computed that the expected monetary value of the best decision without sample information is 154.35 million. The company has developed the following conditional probability table for their decision problem.
-Refer to Exhibit 14.6. What formula should go in cell C13 of the probability table?
A) =C5/$D4
B) =C5/C$6
C) =C5/$D5
D) =C4/$D4

Free

Multiple Choice

Q 50Q 50

Exhibit 14.7
The following questions use the information below.
A decision maker is faced with two alternatives. The decision maker has determined that she is indifferent between the two alternatives when p = 0.45.
-Refer to Exhibit 14.7. What is the expected value of Alternative 2 for this decision maker?
A) $82,000
B) $56,100
C) $64,350
D) $72,600

Free

Multiple Choice

Q 51Q 51

Exhibit 14.7
The following questions use the information below.
A decision maker is faced with two alternatives. The decision maker has determined that she is indifferent between the two alternatives when p = 0.45.
-Refer to Exhibit 14.7. What is the decision maker's certainty equivalent for this problem?
A) $15,000
B) $82,000
C) $56,100
D) $82,000

Free

Multiple Choice

Q 52Q 52

Exhibit 14.7
The following questions use the information below.
A decision maker is faced with two alternatives. The decision maker has determined that she is indifferent between the two alternatives when p = 0.45.
-Refer to Exhibit 14.7. What is the decision maker's risk premium for this problem?
A) $20,000
B) $25,900
C) $70,000
D) $80,000

Free

Multiple Choice

Q 53Q 53

What is the formula for the exponential utility function U(x)?
A) e

^{}^{x/R}B) 1 + e^{}^{x/R}C) 1 e^{x/R}D) 1 e^{}^{x/R}Free

Multiple Choice

Q 54Q 54

What is the formula for the weighted average score for alternative j when using a multi-criteria scoring model?
A)
B)
C)
D)

Free

Multiple Choice

Free

Multiple Choice

Q 56Q 56

The scores in a scoring model can be thought of as subjective assessments of
A) usefulness.
B) worthiness.
C) utility.
D) payoff.

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Multiple Choice

Q 57Q 57

A fast food restaurant is considering opening a new store at one of four locations. They have developed the following multi-criteria scoring model for this problem. What location should they choose based on this information?
A) A
B) B
C) C
D) D

Free

Multiple Choice

Q 58Q 58

Based on the radar chart of raw scores provided below, why is this decision complex?
A) The chart is hard to read.
B) No site wins on all four criteria.
C) No site achieves a perfect score of 1.0 on a criteria.
D) No sites have sufficient security.

Free

Multiple Choice

Q 59Q 59

Based on the radar chart of the weighted scores provided below, which of the following interpretations is incorrect?
A) Site A wins on the Sales criteria but is last on the Location criteria.
B) Site C wins on the Security criteria and scores high on the remaining three criteria.
C) Site B scores lowest on each of the four criteria.
D) No site dominates on each of the four criteria.

Free

Multiple Choice

Q 60Q 60

Exhibit 14.8
The following questions use the information below.
A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.8. What formula should go in cell F11 and get copied to F12:F13 of the Price worksheet to compute the Price Score?
A) =AVERAGE(C4:C6)
B) =AVERAGE(C11:E11)
C) =AVERAGE(G11:G13)
D) =AVERAGE(C7:E7)

Free

Multiple Choice

Q 61Q 61

Exhibit 14.8
The following questions use the information below.
A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.8. What formula should go in cell G11 and get copied to G12:G13 of the Price worksheet to compute the Consistency Measure?
A) =MMULT(C4:E4,$F$11:$F$13)
B) =SUMPRODUCT(C4:E4,$F$11:$F$13)/F11
C) =MMULT(C4:E4,$F$11:$F$13)/F11
D) =MMULT(C7:E7,$F$11:$F$13)/F11

Free

Multiple Choice

Q 62Q 62

Exhibit 14.8
The following questions use the information below.
A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.8. What formula should go in cell G15 of the Price worksheet to compute the Consistency Ratio?
A) =AVERAGE(G11:G13)-3)/(2*0.58)
B) =AVERAGE(G11:G13)-3)
C) =AVERAGE(G11:G13))/(2*0.58)
D) =AVERAGE(G11:G13)-3)/0.58

Free

Multiple Choice

Q 63Q 63

Exhibit 14.8
The following questions use the information below.
A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.8. What formula should go in cell C7 and get copied to D7:E7 of the Summary worksheet to compute the Weighted Average Score?
A) =SUMPRODUCT(C4:E4,$G$4:$G$6)
B) =SUMPRODUCT(C4:C6,$C$5:$C$7)
C) =SUMPRODUCT($G$4,$G$6)
D) =SUMPRODUCT(C4:C6,$G$4:$G$6)

Free

Multiple Choice

Q 64Q 64

Exhibit 14.8
The following questions use the information below.
A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.8. Which policy should the company choose based on the Summary worksheet?
A) A
B) B
C) C
D) None of these

Free

Multiple Choice

Q 65Q 65

Exhibit 14.8
The following questions use the information below.
A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.8. The Consistency Ratio indicates consistency in the pairwise comparison matrix if the ratio is
A) 0.05
B) 0.10
C) 0.20
D) 0.30

Free

Multiple Choice

Q 66Q 66

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. What decision should be made according to the maximax decision rule?

Free

Short Answer

Q 67Q 67

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. What decision should be made according to the maximin decision rule?

Free

Short Answer

Q 68Q 68

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. What decision should be made according to the minimax regret decision rule?

Free

Short Answer

Q 69Q 69

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. What formula should go in cell D5 and get copied to D6:D8 to implement the maximax decision rule?

Free

Short Answer

Q 70Q 70

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. What formula should go in cell D5 and get copied to D6:D8 to implement the maximin decision rule?

Free

Short Answer

Q 71Q 71

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. Assume the formula =MAX(B5:C5) was entered in cell D5 and copied to cells D6:D8. What formula should go in cell E5 and get copied to cells E6:E8 to place a "<==" to indicate the choice according to the maximax decision rule?

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Q 72Q 72

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. Assume the formula =MIN(B5:C5) was entered in cell D5 and copied to cells D6:D8. What formula should go in cell E5 and get copied to cells E6:E8 to place a "<==" to indicate the choice according to the maximin decision rule?

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Short Answer

Q 73Q 73

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. The original payoff data is in the worksheet called "Payoffs". What formula should go in cell B5 of this Regret Matrix to compute the regret value?

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Short Answer

Q 74Q 74

Exhibit 14.9
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem.
-Refer to Exhibit 14.9. What formula should go in cell D5 of the following Regret Table to implement the minimax regret decision rule? Assume that cells B5:C8 contain the regret values for the problem.

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Q 75Q 75

Exhibit 14.10
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 80% and an expanding economy at 20%.
-Refer to Exhibit 14.10. Complete the table using the expected monetary value decision rule and indicate which decision should be made according to that rule.

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Q 76Q 76

Exhibit 14.10
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 80% and an expanding economy at 20%.
-Refer to Exhibit 14.10. The original payoff data is in the worksheet above called "Payoffs". What formula should go in cell B5 of the spreadsheet if the expected regret decision rule is to be used?

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Q 77Q 77

Exhibit 14.10
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 80% and an expanding economy at 20%.
-Refer to Exhibit 14.10. Complete the Regret Table according to the expected regret decision rule.

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Q 78Q 78

Exhibit 14.10
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 80% and an expanding economy at 20%.
-Refer to Exhibit 14.10. Complete the following table to determine the expected value of perfect information for the investor.

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Q 79Q 79

Exhibit 14.10
The following questions are based on the information below.
An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 80% and an expanding economy at 20%.
-Refer to Exhibit 14.10. What formulas should go in cell D5:D14 and B12:C12 of the spreadsheet to compute the EVPI?

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Q 80Q 80

An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 25% and an expanding economy at 75%. What is the correct decision for this investor based on an expected monetary value criteria? Draw the decision tree for this problem.

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Q 81Q 81

An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can be weak or strong. The investor has estimated the probability of a declining economy at 30% and an expanding economy at 70%. Draw the decision tree for this problem and determine the correct decision for this investor based on the expected monetary value criteria.

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Q 82Q 82

An investor is considering 2 investments, A, B, which can be purchased now for $10. There is a 40% chance that investment A will grow rapidly in value and a 60% chance that it will grow slowly. If A grows rapidly the investor can cash it in for $80 or trade it for investment C which has a 25% chance of growing to $100 and a 75% chance of reaching $80. If A grows slowly it is sold for $50. There is a 70% chance that investment B will grow rapidly in value and a 30% chance that it will grow slowly. If B grows rapidly the investor can cash it in for $100 or trade it for investment D which has a 20% chance of growing to $95 and an 80% chance of reaching $80. If B grows slowly it is sold for $45. Draw the decision tree for this problem.

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Q 83Q 83

An investor is considering 2 investments, A, B, which can be purchased now for $10. There is a 40% chance that investment A will grow rapidly in value and a 60% chance that it will grow slowly. If A grows rapidly the investor can cash it in for $80 or trade it for investment C which has a 25% chance of growing to $100 and a 75% chance of reaching $80. If A grows slowly it is sold for $50. There is a 70% chance that investment B will grow rapidly in value and a 30% chance that it will grow slowly. If B grows rapidly the investor can cash it in for $100 or trade it for investment D which has a 20% chance of growing to $95 and an 80% chance of reaching $80. If B grows slowly it is sold for $45. What is the multistage decision for this investor and what is the EMV for this decision?

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Q 84Q 84

A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is a 72% chance that demand for their products will be high and a 28% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 76% chance that the customers will like the products and a 24% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is an 87% chance that demand will be high for the products. If the survey is unfavorable there is only a 25% chance that the demand will be high. Draw the decision tree for the problem when the survey is performed before the plant size decision is made.

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Q 85Q 85

Exhibit 14.11
The following questions use the information below.
A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 72% chance that demand for their products will be high and a 28% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 76% chance that the customers will like the products and a 24% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is an 87% chance that demand will be high for the products. If the survey is unfavorable there is only a 25% chance that the demand will be high.
The company has developed the following conditional probability table for their decision problem.
-Refer to Exhibit 14.11. What is P(FH), where F = favorable response and H = high demand?

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Q 86Q 86

Exhibit 14.11
The following questions use the information below.
A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 72% chance that demand for their products will be high and a 28% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 76% chance that the customers will like the products and a 24% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is an 87% chance that demand will be high for the products. If the survey is unfavorable there is only a 25% chance that the demand will be high.
The company has developed the following conditional probability table for their decision problem.
-Refer to Exhibit 14.11. What formula should go in cell C13 of the probability table?

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Q 87Q 87

Exhibit 14.12
The following questions use the information below.
A decision maker is faced with two alternatives.
The decision maker has determined that she is indifferent between the two alternatives when p = 0.7.
-Refer to Exhibit 14.12. What is the expected value of Alternative 2 for this decision maker?

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Q 88Q 88

Exhibit 14.12
The following questions use the information below.
A decision maker is faced with two alternatives.
The decision maker has determined that she is indifferent between the two alternatives when p = 0.7.
-Refer to Exhibit 14.12. What is the decision maker's certainty equivalent for this problem?

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Q 89Q 89

Exhibit 14.12
The following questions use the information below.
A decision maker is faced with two alternatives.
The decision maker has determined that she is indifferent between the two alternatives when p = 0.7.
-Refer to Exhibit 14.12. What is the decision maker's risk premium for this problem?

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Q 90Q 90

A convenience store chain is considering opening a new store at one of four locations. They have developed the following multi-criteria scoring model for this problem.
What formula should be entered into cell C8-F8 to compute the weighted average scores?

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Q 91Q 91

A convenience store chain is considering opening a new store at one of four locations. They have developed the following multi-criteria scoring model for this problem. Complete the table for this problem. What location should they choose based on this information?

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Q 92Q 92

A convenience store chain is considering opening a new store at one of four locations. They have developed the following multi-criteria scoring model for this problem. What formulas must be placed in cells C13:F16 to compute the weighted scores for use in generating a Weighted Score radar chart?

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Q 93Q 93

A convenience store chain is considering opening a new store at one of four locations. They have developed the following multi-criteria scoring model for this problem. Complete the follow table to prepare the spreadsheet for use in generating a Weighted Score radar chart?

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Q 94Q 94

Exhibit 14.13
The following questions use the information below.
A student wants to buy a new car. She has three cars to choose from, A, B and C. The cars differ with respect to price, performance and looks. The student has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.13. What formula should go in cell F11 and copied to cells F12:F13 of the Price worksheet to compute the Price Score?

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Q 95Q 95

Exhibit 14.13
The following questions use the information below.
A student wants to buy a new car. She has three cars to choose from, A, B and C. The cars differ with respect to price, performance and looks. The student has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.13. What formula should go in cell G11 and copied to cells G12:G13 of the Price worksheet to compute the Consistency Measure?

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Q 96Q 96

Exhibit 14.13
The following questions use the information below.
A student wants to buy a new car. She has three cars to choose from, A, B and C. The cars differ with respect to price, performance and looks. The student has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.13. What formula should go in cell G15 of the Price worksheet to compute the Consistency Ratio?

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Q 97Q 97

Exhibit 14.13
The following questions use the information below.
A student wants to buy a new car. She has three cars to choose from, A, B and C. The cars differ with respect to price, performance and looks. The student has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.13. What formula should go in cell C7 and copied to cells D7:E7 of the Summary worksheet to compute the Weighted Average Score?

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Q 98Q 98

Exhibit 14.13
The following questions use the information below.
A student wants to buy a new car. She has three cars to choose from, A, B and C. The cars differ with respect to price, performance and looks. The student has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations.
-Refer to Exhibit 14.13. Which car should the student choose based on the Summary worksheet?

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Q 99Q 99

Exhibit 14.14
The following questions use the Decision Tree model and strategy table information below.
-Refer to Exhibit 14.14. You want to conduct a risk analysis on P(G|A) and P(G|B). What Decision Tree model changes must you make to be able to use a strategy table?

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Q 100Q 100

Exhibit 14.14
The following questions use the Decision Tree model and strategy table information below.
-Refer to Exhibit 14.14. What formula is placed in cell B3 of the strategy table to complete the table as provided?

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Q 101Q 101

Exhibit 14.14
The following questions use the Decision Tree model and strategy table information below.
-Refer to Exhibit 14.14. Why does the strategy table, examining the risk associated with P(G|A) and P(G|B) never show "Sell A" or "Trade B for D" as selected options?

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Q 102Q 102

Project 14.1 The Pre-Paid Gas Tank Decision
Your company has sent you on business to the Los Angeles (LA) metropolitan area. Upon your arrival at LAX, you make your way to the Klunker Car Rental counter. As usual, the line at the counter is long, so you enter and begin your wait. While waiting you notice that Klunker is offering a special deal on gas. They are selling gas for $1.579 per gallon. However, you must purchase a full tank when you rent the car. Klunker also says that the average price per gallon of gas in the LA area is $1.60. You are uncertain of several necessary pieces of information to determine whether you should take advantage of this deal. These are:
First, you expect to drive between 150 and 250 miles on this trip. You believe there is an equal chance that you will drive either of these extreme amounts. However, you may have to make a side trip to Edwards AFB that will increase the total miles to 500. You believe there is a 1 in 5 chance that this will happen. Normally, Klunker rents you a mid-size car. You believe most cars in this class have either a 15 gallon gas tank with 60% confidence or a 18 gallon gas tank with 40% confidence. You've heard that cars in this class get as much as 25 mpg on the highway but may get as little as 18 mpg city driving. You decide there is an 70% chance most of your driving will be on the freeways and the rest in the city. Finally, you don't believe Klunker's posted average price of $1.60 per gallon in the LA area. You guess that there is 40% chance that the gas will be $1.259, 20% chance it will be $1.479 and a 40% chance it will be $1.659. Assume you must decide whether to pre-purchase the tank of gas prior to talking to a Klunker clerk.
a.
Draw the decision tree for this problem using Decision Tree in Excel.
b.
What is the optimal decision?
c.
Now suppose you can delay your decision until you speak to a clerk and find out exactly how much gas your rental car holds. The clerk says the car you will rent holds 18 gallons of gas. What is your optimal decision now? What is the value of this additional information?

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