Question 1

If the payoff from outcome A is twice the payoff from outcome B, then the ratio of these utilities will be

Accepted Answer

The ratio of utilities depends on the utility function, which may not be linear. Therefore, without knowing the specific utility function, the ratio of utilities cannot be determined solely based on the payoff amounts.

Question 2

​The probability for which a decision maker cannot choose between a certain amount and a lottery based on that probability is

Accepted Answer

The indifference probability is the probability at which a decision maker is indifferent between a certain outcome and a lottery, meaning they have no preference between the two.

Question 3

Super Cola is also considering the introduction of a root beer drink. The company feels that the probability that the product will be a success is .6. The payoff table is as follows: The company has a choice of two research firms to obtain information for this product. Stanton Marketing has market indicators, I₁ and I₂ for which P(I₁ | s₁) = .7 and P(I₁ | s₂) = .4. New World Marketing has indicators J₁ and J₂ for which P(J₁ | s₁) = .6 and P(J₁ | s₂) = .3. a.What is the optimal decision if neither firm is used? Over what probability of success range is this decision optimal? b.What is the EVPI? c.Find the EVSIs and efficiencies for Stanton and New World. d.If both firms charge $5,000, which firm should be hired? e.If Stanton charges $10,000 and New World charges $4,000, which firm should Super Cola hire? Why?

Accepted Answer

The answer of Super Cola is also considering the introduction...

Question 4

​A decision maker whose utility function graphs as a straight line is

Accepted Answer

A utility function that graphs as a straight line represents constant marginal utility, which indicates risk neutrality. This individual is neither risk averse nor a risk taker, but rather indifferent towards risk.

Question 5

A payoff table is given as a.What choice should be made by the optimistic decision maker? b.What choice should be made by the conservative decision maker? c.What decision should be made under minimax regret? d.If the probabilities of d₁, d₂, and d₃ are .2, .5, and .3, respectively, then what choice should be made under expected value? e.What is the EVPI?

Accepted Answer

The answer of A payoff table is given as
​ ...

Question 6

Transrail is bidding on a project that it figures will cost $400,000 to perform. Using a 25% markup, it will charge $500,000, netting a profit of $100,000. However, it has been learned that another company, Rail Freight, is also considering bidding on the project. If Rail Freight does submit a bid, it figures to be a bid of about $470,000. Transrail really wants this project and is considering a bid with only a 15% markup to $460,000 to ensure winning regardless of whether or not Rail Freight submits a bid.
a.
Prepare a profit payoff table from Transrail's point of view.
b.
What decision would be made if Transrail were conservative?
c.
If Rail Freight is known to submit bids on only 25% of the projects it considers, what decision should Transrail make?
d.
Given the information in (c), how much would a corporate spy be worth to Transrail to find out if Rail Freight will bid?

Accepted Answer

The answer of Transrail is bidding on a project that...

Question 7

?A decision maker has chosen .4 as the probability for which he cannot choose between a certain loss of 10,000 and the lottery p(-25000) + (1 - p)(5000). If the utility of -25,000 is 0 and of 5000 is 1, then the utility of -10,000 is

Accepted Answer

The answer of ?A decision maker has chosen .4 as...

Question 8

An appliance dealer must decide how many (if any) new microwave ovens to order for next month. The ovens cost $220 and sell for $300. Because the oven company is coming out with a new product line in two months, any ovens not sold next month will have to be sold at the dealer's half price clearance sale. Additionally, the appliance dealer feels he suffers a loss of $25 for every oven demanded when he is out of stock. On the basis of past months' sales data, the dealer estimates the probabilities of monthly demand (D) for 0, 1, 2, or 3 ovens to be .3, .4, .2, and .1, respectively.
The dealer is considering conducting a telephone survey on the customers' attitudes towards microwave ovens. The results of the survey will either be favorable (F), unfavorable (U) or no opinion (N). The dealer's probability estimates for the survey results based on the number of units demanded are:  ​ 
a.
What is the dealer's optimal decision without conducting the survey?
b.
What is the EVPI?
c.
Based on the survey results what is the optimal decision strategy for the dealer?
d.
What is the maximum amount he should pay for this survey?

Accepted Answer

The answer of An appliance dealer must decide how many...

Question 9

A decision maker has developed the following decision tree. How sensitive is the choice between N and P to the probabilities of states of nature U and V?

Accepted Answer

The answer of A decision maker has developed the following...

Question 10

East West Distributing is in the process of trying to determine where they should schedule next year's production of a popular line of kitchen utensils that they distribute. Manufacturers in four different countries have submitted bids to East West. However, a pending trade bill in Congress will greatly affect the cost to East West due to proposed tariffs, favorable trading status, etc.
After careful analysis, East West has determined the following cost breakdown for the four manufacturers (in $1,000's) based on whether or not the trade bill passes:  ​ 
a.
If East West estimates that there is a 40% chance of the bill passing, which country should they choose for manufacturing?
b.
Over what range of values for the "bill passing" will the solution in part (a) remain optimal?

Accepted Answer

The answer of East West Distributing is in the process...

Question 11

The table shows both prospective profits and losses for a company, depending on what decision is made and what state of nature occurs. Use the information to determine what the company should do.
​​  ​ 
a.
if an optimistic strategy is used.
b.
if a conservative strategy is used.
c.
if minimax regret is the strategy.

Accepted Answer

The answer of The table shows both prospective profits and...

Question 12

​When the utility function for a risk-neutral decision maker is graphed (with monetary value on the horizontal axis and utility on the vertical axis), the function appears as

Accepted Answer

A risk-neutral decision maker has a linear utility function, meaning that they value each additional unit of monetary value equally, resulting in a straight line when graphed.

Question 13

A payoff table is given as a.What decision should be made by the optimistic decision maker? b.What decision should be made by the conservative decision maker? c.What decision should be made under minimax regret? d.If the probabilities of s₁, s₂, and s₃ are .2, .4, and .4, respectively, then what decision should be made under expected value? e.What is the EVPI?

Accepted Answer

The answer of A payoff table is given as
​ ...

Question 14

Dollar Department Stores has just acquired the chain of Wenthrope and Sons Custom Jewelers. Dollar has received an offer from Harris Diamonds to purchase the Wenthrope store on Grove Street for $120,000. Dollar has determined probability estimates of the store's future profitability, based on economic outcomes, as: P($80,000) = .2, P($100,000) = .3, P($120,000) = .1, and P($140,000) = .4. a.Should Dollar sell the store on Grove Street? b.What is the EVPI? c.Dollar can have an economic forecast performed, costing $10,000, that produces indicators I₁ and I₂, for which P(I₁ | 80,000) = .1; P(I₁ | 100,000) = .2; P(I₁ | 120,000) = .6; P(I₁ | 140,000) = .3. Should Dollar purchase the forecast?

Accepted Answer

The answer of Dollar Department Stores has just acquired the...

Question 15

Jim has been employed at Gold Key Realty at a salary of $2,000 per month during the past year. Because Jim is considered to be a top salesman, the manager of Gold Key is offering him one of three salary plans for the next year: (1) a 25% raise to $2,500 per month; (2) a base salary of $1,000 plus $600 per house sold; or, (3) a straight commission of $1,000 per house sold. Over the past year, Jim has sold up to 6 homes in a month.
a. Compute the monthly salary payoff table for Jim.
b. For this payoff table find Jim's optimal decision using: (1) the conservative approach, (2) minimax regret approach.
c. Suppose that during the past year the following is Jim's distribution of home sales. If one assumes that this a typical distribution for Jim's monthly sales, which salary plan should Jim select?

Accepted Answer

The answer of Jim has been employed at Gold Key...

Question 16

​When the decision maker prefers a guaranteed payoff value that is smaller than the expected value of the lottery, the decision maker is

Accepted Answer

A risk avoider prefers certainty and is willing to accept a lower guaranteed payoff rather than face the uncertainty of a lottery with a higher expected value.

Question 17

Fold back the decision tree and state what strategy should be followed.
​

Accepted Answer

The answer of Fold back the decision tree and state...

Question 18

The Super Cola Company must decide whether or not to introduce a new diet soft drink. Management feels that if it does introduce the diet soda it will yield a profit of $1 million if sales are around 100 million, a profit of $200,000 if sales are around 50 million, or it will lose $2 million if sales are only around 1 million bottles. If Super Cola does not market the new diet soda, it will suffer a loss of $400,000.
a.
Construct a payoff table for this problem.
b.
Construct a regret table for this problem.
c.
Should Super Cola introduce the soda if the company: (1) is conservative; (2) is optimistic; (3) wants to minimize its maximum disappointment?
d.
An internal marketing research study has found P(100 million in sales) = 1/3; P(50 million in sales) = 1/2; P(1 million in sales) = 1/6. Should Super Cola introduce the new diet soda?
e.
A consulting firm can perform a more thorough study for $275,000. Should management have this study performed?

Accepted Answer

The answer of The Super Cola Company must decide whether...

Question 19

If p is the probability of Event 1 and (1 − p) is the probability of Event 2, for what values of p would you choose A? B? C? Values in the table are payoffs.

Accepted Answer

The answer of If p is the probability of Event...

Question 20

Lakewood Fashions must decide how many lots of assorted ski wear to order for its three stores. Information on pricing, sales, and inventory costs has led to the following payoff table, in thousands.
​  ​ 
a.
What decision should be made by the optimist?
b.
What decision should be made by the conservative?
c.
What decision should be made using minimax regret?

Accepted Answer

The answer of Lakewood Fashions must decide how many lots...

Quiz 13: Decision Analysis

If the payoff from outcome A is twice the payoff from outcome B, then the ratio of these utilities will be

The probability for which a decision maker cannot choose between a certain amount and a lottery based on that probability is

A decision maker whose utility function graphs as a straight line is

?A decision maker has chosen .4 as the probability for which he cannot choose between a certain loss of 10,000 and the lottery p(-25000) + (1 - p) (5000) . If the utility of -25,000 is 0 and of 5000 is 1, then the utility of -10,000 is

A decision maker has developed the following decision tree. How sensitive is the choice between N and P to the probabilities of states of nature U and V?

When the utility function for a risk-neutral decision maker is graphed (with monetary value on the horizontal axis and utility on the vertical axis) , the function appears as

When the decision maker prefers a guaranteed payoff value that is smaller than the expected value of the lottery, the decision maker is

Fold back the decision tree and state what strategy should be followed.

If p is the probability of Event 1 and (1 − p) is the probability of Event 2, for what values of p would you choose A? B? C? Values in the table are payoffs.

Quiz 13: Decision Analysis

If the payoff from outcome A is twice the payoff from outcome B, then the ratio of these utilities will be

​The probability for which a decision maker cannot choose between a certain amount and a lottery based on that probability is

​A decision maker whose utility function graphs as a straight line is

?A decision maker has chosen .4 as the probability for which he cannot choose between a certain loss of 10,000 and the lottery p(-25000) + (1 - p) (5000) . If the utility of -25,000 is 0 and of 5000 is 1, then the utility of -10,000 is

A decision maker has developed the following decision tree. How sensitive is the choice between N and P to the probabilities of states of nature U and V?

​When the utility function for a risk-neutral decision maker is graphed (with monetary value on the horizontal axis and utility on the vertical axis) , the function appears as

​When the decision maker prefers a guaranteed payoff value that is smaller than the expected value of the lottery, the decision maker is

Fold back the decision tree and state what strategy should be followed. ​

If p is the probability of Event 1 and (1 − p) is the probability of Event 2, for what values of p would you choose A? B? C? Values in the table are payoffs.

The probability for which a decision maker cannot choose between a certain amount and a lottery based on that probability is

A decision maker whose utility function graphs as a straight line is

When the utility function for a risk-neutral decision maker is graphed (with monetary value on the horizontal axis and utility on the vertical axis) , the function appears as

When the decision maker prefers a guaranteed payoff value that is smaller than the expected value of the lottery, the decision maker is

Fold back the decision tree and state what strategy should be followed.