Exam 17: Decision Making

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.

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

TABLE 17-6 A student wanted to find out the optimal strategy to study for a Business Statistics exam. He constructed the following payoff table based on the average amount of time he needed to put in every week studying for the course and the degree of difficulty of the exam. From the information that he gathered from students who had taken the course, he concluded that there was a 40% probability that the exam would be easy. 16 hours 8 hours 4 hours Easy Exam 40 60 80 Difficult Exam 100 50 0 -Referring to Table 17-6, the optimal strategy using the maximax criterion is to study 16 hours per week on average for the exam.

TABLE 17-5 $\text { The following payoff table showsprofits associated witha set of } 2 \text { alternatives under } 3 \text { possible events. }$ $\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$ Event A B 1 1000 1200 2 500 700 3 300 -200 Suppose that the probability of Event 1 is 0.2, Event 2 is 0.5, and Event 3 is 0.3. -Referring to Table 17-5, what is the EMV for Action B?

TABLE 17-6 A student wanted to find out the optimal strategy to study for a Business Statistics exam. He constructed the following payoff table based on the average amount of time he needed to put in every week studying for the course and the degree of difficulty of the exam. From the information that he gathered from students who had taken the course, he concluded that there was a 40% probability that the exam would be easy. 16 hours 8 hours 4 hours Easy Exam 40 60 80 Difficult Exam 100 50 0 -Referring to Table 17-6, the optimal strategy using the expected opportunity loss criterion is to study 8 hours per week on average for the exam.

TABLE 17-5 The following payoff table shows profits associated with a set of 2 alternatives under 3 possible events. $\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$ Event A B 1 1000 1200 2 500 700 3 300 -200 Suppose that the probability of Event 1 is 0.2, Event 2 is 0.5, and Event 3 is 0.3. -Referring to Table 17-5, what is the EOL for Action A?

TABLE 17-5 The following payoff table shows profits associated with a set of 2 alternatives under 3 possible events. $\quad$ $\quad$ $\quad$ $\quad$ $\text {Action }$ Event A B 1 1000 1200 2 500 700 3 300 -200 Suppose that the probability of Event 1 is 0.2, Event 2 is 0.5, and Event 3 is 0.3. -Referring to Table 17-5, what is the opportunity loss for Action A with Event 2?