Exam 19: Decision Making

The risk- _______ curve represents the expected monetary value approach.

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 expected opportunity loss criterion is to study 16 hours per week on average for the exam.

A tabular presentation that shows the outcome for each decision alternative under the various states of nature is called:

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 events in this decision-making 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, the opportunity loss for A2 when S1 occurs 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 return to risk ratio for Action B?