Question 1

In decision making under risk,probabilities associated with future events are usually unknown.

Accepted Answer

A) True 
 B)False

Question 2

Dan faces the option to sell his small seafood company to an interested bidder.Assume that if he stays in business for another year,his company will be worth $5 million with 0.7 probability,and $0.5 million with 0.3 probability.If Dan chooses to accept an offer of $2 million for his company,rather than going with the gamble of another year with the company,then what is the risk premium?

Accepted Answer

The answer of Dan faces the option to sell his...

Question 3

Use this information to answer the following questions.
AAA auto supply store sells snow tires which are ordered every Friday to meet next week's demand.The sales price for the most popular size is $50 per tire and its cost for AAA is $35.If too many tires are ordered AAA incurs an inventory carrying cost of $2 per tire.If AAA is out of stock,it forgoes the profits from missed sales.AAA has the option to order 100,150,or 200 tires to meet next week's demand which can be either 100,150,or 200 tires.
-Refer to the information above.Based on its historical demand distribution,assume that AAA Inc.has determined the following probability information: P(100)= 0.4,P(150)= 0.3,and P(200)= 0.3.
a.Which alternative should be chosen using the expected monetary value (EMV)criterion?
b.What is the expected value under certainty?
c.What is the expected value under perfect information (EVPI)?

Accepted Answer

The answer of Use this information to answer the following...

Question 4

The minimax regret criterion minimizes the maximum opportunity loss within each alternative.

Accepted Answer

A) True 
 B)False

Question 5

Limousine Inc.must decide how many new limousines to buy.The owner has narrowed down the decision to two choices: buy one limousine or two limousines.If only one limousine is bought and demand ridership is high,a second limousine can be bought later.The probability of high demand is ridership 0.65,and the probability of low demand ridership is 0.35.The net present value obtained with the purchase of two limousines is $100,000 if demand is high and $65,000 if demand is low.The net present value for one limousine and low demand is $55,000.If demand is high,there are two options.The first option is to buy a second limousine.This option has a net present value of $80,000.The second option is to do nothing,which would have a net present value of $50,000.
a. Develop a decision tree for this problem.
b.Analyze the decision tree and determine how many limousines should be bought initially.

Accepted Answer

a.
 @#IMG-DLM& b.Buy

Question 6

The EMV that a person is willing to give up in order to avoid the risk associated with a gamble is referred to as the ________.

Accepted Answer

A) risk premium 
B) certainty equivalent 
C) EVPI 
D) EVwPI 
E) EVSI 
A) risk premium 
B) certainty equivalent 
C) EVPI 
D) EVwPI 
E) EVSI

Question 7

Strike It Rich is a gold mining company that is attempting to decide whether to invest in a particular site.The probability that the site has gold is 0.50.In order to obtain more information about the potential presence of gold,the company has hired a geologist to analyze the soil.Past history indicates that there is a 60% chance that the geologist's test is positive given the presence of gold and a 35% chance that the test is positive given the absence of any gold.What is the probability of the presence of gold given that the geologist's test yielded a positive result? Use Bayes' theorem to compute this posterior probability.

Accepted Answer

The answer of Strike It Rich is a gold mining...

Question 8

Use this information to answer the following questions.
A bakery must decide how many pies to prepare for the upcoming weekend.The bakery has the option to make 50,100,or 150 pies.Assume that demand for the pies can be 50,100,or 150.Each pie costs $5 to make and sells for $7.Unsold pies are donated to a nearby charity center.Assume that there is no opportunity cost for lost sales.
-Refer to the information above.Assume that the bakery (see problem 7)has obtained the following probability information regarding demand for the pies: P(50)= 0.3,P(100)= 0.5,and P(150)= 0.2.
a.Which alternative should be chosen using the expected monetary value (EMV)criterion?
b.What is the expected value under certainty?
c.What is the expected value under perfect information (EVPI)?

Accepted Answer

The answer of Use this information to answer the following...

Question 9

Use this information to answer the following questions.
A plant manager is considering buying additional stamping machines to accommodate increasing demand.The alternatives are to buy 1 machine,2 machines,or 3 machines.The profits realized under each alternative are a function of whether their bid for a recent defense contract is accepted or not.The payoff table below illustrates the profits realized (in $000's)based on the different scenarios faced by the manager.
 $$\begin{array} { l c c } 
\text { Alternative } & \text { Bid Accepted } & \text { Bid Rejected } \
\hline \text { Buy 1 machine } & \$ 10 & \$ 5 \
\text { Buy 2 machines } & \$ 30 & \$ 4 \
\text { Buy 3 machines } & \$ 40 & \$ 2
\end{array}$$
-Refer to the information above.Assume that based on historical bids with the defense contractor,the plant manager believes that there is a 65% chance that the bid will be accepted and a 35% chance that the bid will be rejected.
a.Which alternative should be chosen using the expected monetary value (EMV)criterion?
b.What is the expected value under certainty?
c.What is the expected value under perfect information (EVPI)?

Accepted Answer

The answer of Use this information to answer the following...

Question 10

Use this information to answer the following questions.
Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3.
  
-Refer to the payoff table.Using the criterion of realism and an alpha value of 0.7,what would be the highest expected payoff?

Accepted Answer

A) $127 
B) $119.5 
C) $98.5 
D) $116 
E) $145 
A) $127 
B) $119.5 
C) $98.5 
D) $116 
E) $145

Question 11

The expected value of perfect information (EVPI)places a lower bound on how much a decision maker should be willing to pay to obtain perfect information.

Accepted Answer

A) True 
 B)False

Question 12

In multistage decision trees,it is not possible for one outcome to follow another.

Accepted Answer

A) True 
 B)False

Question 13

The expected opportunity loss (EOL)will always result in the same decision as the maximum expected monetary value (EMV).

Accepted Answer

A) True 
 B)False

Question 14

In a payoff table,the payoff values must always be expressed as profits.

Accepted Answer

A) True 
 B)False

Question 15

In a decision tree representation,round nodes represent decision alternatives.

Accepted Answer

A) True 
 B)False

Question 16

Use this information to answer the following questions.
Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3.
  
-Refer to the payoff table.What is the expected value under certainty? Assume P(S1)= 0.5 and P(S2)= 0.25.

Accepted Answer

A) $101.25 
B) $103.33 
C) $108.33 
D) $116.25 
E) $136.25 
A) $101.25 
B) $103.33 
C) $108.33 
D) $116.25 
E) $136.25

Question 17

Which of the following statements concerning decision trees is False?

Accepted Answer

A) Decision nodes are represented by a square. 
B) Outcome nodes are represented by a circle. 
C) EMV is calculated at each outcome. 
D) The alternative is chosen with the highest EMV. 
E) Decision trees are solved by starting at the first decision node and moving forward. 
A) Decision nodes are represented by a square. 
B) Outcome nodes are represented by a circle. 
C) EMV is calculated at each outcome. 
D) The alternative is chosen with the highest EMV. 
E) Decision trees are solved by starting at the first decision node and moving forward.

Question 18

Use this information to answer the following questions.
Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3.
  
-Refer to the payoff table.Using the Laplace criterion,what would be the highest expected payoff?

Accepted Answer

A) $103.3 
B) $108.3 
C) $120 
D) $125 
E) $145 
A) $103.3 
B) $108.3 
C) $120 
D) $125 
E) $145

Question 19

Use this information to answer the following questions.
Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3.
  
-Refer to the payoff table.Using the expected monetary value (EMV)criterion,what is the highest attainable expected profit? Assume P(S1)= 0.5 and P(S2)= 0.25.

Accepted Answer

A) $101.25 
B) $103.33 
C) $108.33 
D) $125 
E) $145 
A) $101.25 
B) $103.33 
C) $108.33 
D) $125 
E) $145

Question 20

An individual who is indifferent to risk would have a utility curve that is linear.

Accepted Answer

A) True 
 B)False

In decision making under risk,probabilities associated with future events are usually unknown.

The minimax regret criterion minimizes the maximum opportunity loss within each alternative.

The EMV that a person is willing to give up in order to avoid the risk associated with a gamble is referred to as the ________.

The expected value of perfect information (EVPI)places a lower bound on how much a decision maker should be willing to pay to obtain perfect information.

In multistage decision trees,it is not possible for one outcome to follow another.

The expected opportunity loss (EOL)will always result in the same decision as the maximum expected monetary value (EMV).

In a payoff table,the payoff values must always be expressed as profits.

In a decision tree representation,round nodes represent decision alternatives.

Which of the following statements concerning decision trees is False?

Use this information to answer the following questions. Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3. -Refer to the payoff table.Using the Laplace criterion,what would be the highest expected payoff?

An individual who is indifferent to risk would have a utility curve that is linear.

Introduction to Managerial Decision Making

Linear Programming Models: Graphical and Computer Methods

Linear Programming Modeling Applications with Computer Analyses in Excel

Linear Programming Sensitivity Analysis

Transportation, Assignment, and Network Models

Integer, Goal, and Nonlinear Programming Models

Project Management

Queuing Models

Simulation Modeling

Forecasting Models

Inventory Control Models

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Exam 8: Decision Analysis

In decision making under risk,probabilities associated with future events are usually unknown.

The minimax regret criterion minimizes the maximum opportunity loss within each alternative.

The EMV that a person is willing to give up in order to avoid the risk associated with a gamble is referred to as the ________.

The expected value of perfect information (EVPI)places a lower bound on how much a decision maker should be willing to pay to obtain perfect information.

In multistage decision trees,it is not possible for one outcome to follow another.

The expected opportunity loss (EOL)will always result in the same decision as the maximum expected monetary value (EMV).

In a payoff table,the payoff values must always be expressed as profits.

In a decision tree representation,round nodes represent decision alternatives.

Which of the following statements concerning decision trees is False?

Use this information to answer the following questions. Consider the following payoff table that represents the profits earned for each alternative (A,B,and C)under the states of nature S1,S2,and S3. -Refer to the payoff table.Using the Laplace criterion,what would be the highest expected payoff?

An individual who is indifferent to risk would have a utility curve that is linear.

Introduction to Managerial Decision Making

Linear Programming Models: Graphical and Computer Methods

Linear Programming Modeling Applications with Computer Analyses in Excel

Linear Programming Sensitivity Analysis

Transportation, Assignment, and Network Models

Integer, Goal, and Nonlinear Programming Models

Project Management

Queuing Models

Simulation Modeling

Forecasting Models

Inventory Control Models

Filters