Exam 19: Decision Making

To calculate expected profit under certainty, you need to have perfect information about which event will occur.

SCENARIO 19-3 The following information is from 2 investment opportunities. A B Expected monetary value \ 900 \ 600 Standard deviation 100 50 -Referring to Scenario 19-3, which investment has the optimal return to risk ratio?

SCENARIO 19-6 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 mean amount of time he needed to study every week 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 Scenario 19-6, how many possible events are there?

SCENARIO 19-6 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 mean amount of time he needed to study every week 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 Scenario 19-6, the optimal strategy using the coefficient of variation criterion is to study 8 hours per week on average for the exam.

For a potential investment of $5,000, a portfolio has an EMV of $1,000 and a standard deviation of $100. The return to risk ratio is

Blossom's Flowers purchases roses for sale for Valentine's Day. The roses are purchased for $10 a dozen and are sold for $20 a dozen. Any roses not sold on Valentine's Day can be sold for $5 per Dozen. The owner will purchase 1 of 3 amounts of roses for Valentine's Day: 100, 200, or 400 dozen Roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses, Respectively, then the optimal alternative using EMV for selling roses is to buy dozen Roses.

SCENARIO 19-5 The following payoff table shows profits associated with a set of 2 alternatives under 3 possible events. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\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 Scenario 19-5, what is the EVPI for this problem?

SCENARIO 19-1 The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature. States A1 A2 A3 1 12 -2 8 2 4 10 5 where: $\quad S 1$ is state of nature 1 $\quad$$A 1$ is action alternative 1 $\quad$$\quad$$\quad$$S 2$ is state of nature 2 $\quad$$A 2$ is action alternative 2 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$A 3$ is action alternative 3 -Referring to Scenario 19-1, what is the best action using the maximin criterion?

SCENARIO 19-5 The following payoff table shows profits associated with a set of 2 alternatives under 3 possible events. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\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 Scenario 19-5, what is the optimal action using the return to risk ratio?

At Eastern University, 60% of the students are from suburban areas, 30% are from rural areas, and 10% are from urban areas. Of the students from the suburban areas, 60% are nonbusiness majors. Of The students from the rural areas, 70% are nonbusiness majors. Of the students from the urban areas, 90% are nonbusiness majors. If a randomly selected student is not a business major, the probability That the student is from the urban area is

Which of the following is NOT a decision making criterion?

SCENARIO 19-1 The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature. States A1 A2 A3 1 12 -2 8 2 4 10 5 where: $\quad S 1$ is state of nature 1 $\quad$$A 1$ is action alternative 1 $\quad$$\quad$$\quad$$S 2$ is state of nature 2 $\quad$$A 2$ is action alternative 2 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$A 3$ is action alternative 3 -Referring to Scenario 19-1, if the probability of S1 is 0.5, then the return to risk ratio for A1 is

SCENARIO 19-2 The following payoff matrix is given in dollars. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Action }$ Event A B 1 400 700 2 200 500 Suppose the probability of Event 1 is 0.5 and Event 2 is 0.5. -Referring to Scenario 19-2, what is the best action using the maximin criterion?

For a potential investment of $5,000, a portfolio has an EMV of $1,000 and a standard deviation of $100. What is the rate of return?

SCENARIO 19-1 The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature. States A1 A2 A3 1 12 -2 8 2 4 10 5 where: $\quad S 1$ is state of nature 1 $\quad$$A 1$ is action alternative 1 $\quad$$\quad$$\quad$$S 2$ is state of nature 2 $\quad$$A 2$ is action alternative 2 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$A 3$ is action alternative 3 -Referring to Scenario 19-1, if the probability of S1 is 0.2 and S2 is 0.8, then the expected opportunity loss (EOL) for A1 is

SCENARIO 19-5 The following payoff table shows profits associated with a set of 2 alternatives under 3 possible events. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\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 Scenario 19-5, what is the opportunity loss for Action B with Event 3?

SCENARIO 19-1 The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states of nature. States A1 A2 A3 1 12 -2 8 2 4 10 5 where: $\quad S 1$ is state of nature 1 $\quad$$A 1$ is action alternative 1 $\quad$$\quad$$\quad$$S 2$ is state of nature 2 $\quad$$A 2$ is action alternative 2 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$A 3$ is action alternative 3 -Referring to Scenario 19-1, if the probability of S1 is 0.5, then the expected monetary value (EMV ) for A2 is

Removal of uncertainty from a decision-making problem leads to a case referred to as perfect information.

SCENARIO 19-6 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 mean amount of time he needed to study every week 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 Scenario 19-6, what is the coefficient of variation of spending 8 hours per week on average studying for the exam?

A company that manufactures designer jeans is contemplating whether to increase its advertising budget by $1 million for next year. If the expanded advertising campaign is successful, the company Expects sales to increase by $1.6 million next year. If the advertising campaign fails, the company Expects sales to increase by only $400,000 next year. If the advertising budget is not increased, the Company expects sales to increase by $200,000. Identify the actions in this decision-making problem.