Exam 14: Decision Analysis

What is the formula for the exponential utility function U(x)?

A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 69% chance that demand for their products will be high and a 31% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 63% chance that the customers will like the products and a 37% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is a 92% chance that demand will be high for the products. If the survey is unfavorable there is only a 30% chance that the demand will be high. The following decision tree has been built for this problem. The company has computed that the expected monetary value of the best decision without sample information is 154.35 million. The company has developed the following conditional probability table for their decision problem. -Refer to Exhibit 14.6. What is P(), where F = favorable response and H = high demand?

The following questions are based on the information below. An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem. -Refer to Exhibit 14.9. What decision should be made according to the minimax regret decision rule?

An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 80% and an expanding economy at 20%. -Refer to Exhibit 14.10. The original payoff data is in the worksheet above called "Payoffs". What formula should go in cell B5 of the spreadsheet if the expected regret decision rule is to be used?

The decision rule which determines the minimum payoff for each alternative and then selects the alternative associated with the largest minimum payoff is the

A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations. -Refer to Exhibit 14.8. What formula should go in cell G15 of the Price worksheet to compute the Consistency Ratio?

Leaves of a decision tree are also called ____ nodes.

A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations. -Refer to Exhibit 14.8. What formula should go in cell C7 and get copied to D7:E7 of the Summary worksheet to compute the Weighted Average Score?

How are states of nature assigned probabilities?

A company is planning a plant expansion. They can build a large or small plant. The payoffs for the plant depend on the level of consumer demand for the company's products. The company believes that there is an 72% chance that demand for their products will be high and a 28% chance that it will be low. The company can pay a market research firm to survey consumer attitudes towards the company's products. There is a 76% chance that the customers will like the products and a 24% chance that they won't. The payoff matrix and costs of the two plants are listed below. The company believes that if the survey is favorable there is an 87% chance that demand will be high for the products. If the survey is unfavorable there is only a 25% chance that the demand will be high. The company has developed the following conditional probability table for their decision problem. -Refer to Exhibit 14.11. What formula should go in cell C13 of the probability table?

An investor is considering 4 investments, A, B, C, D. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following decision tree has been developed for the problem. The investor has estimated the probability of a declining economy at 40% and an expanding economy at 60%. -Refer to Exhibit 14.5. What is the correct decision for this investor based on an expected monetary value criteria?

-Refer to Exhibit 14.4. What formula should go in cell D14 of the spreadsheet to compute the EVPI?

An investor is considering 4 investments, A, B, C and leaving his money in the bank. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 70% and an expanding economy at 30%. -Refer to Exhibit 14.3. What formula should go in cell F5 and copied to F6:F8 of the spreadsheet if the expected regret decision rule is to be used?

A company needs to buy a new insurance policy. They have three policies to choose from, A, B and C. The policies differ with respect to price, coverage and ease of billing. The company has developed the following AHP tables for price and summary. The other tables are not shown due to space limitations. -Refer to Exhibit 14.8. Which policy should the company choose based on the Summary worksheet?

Project 14.1- The Pre-Paid Gas Tank Decision Your company has sent you on business to the Los Angeles (LA) metropolitan area. Upon your arrival at LAX, you make your way to the Klunker Car Rental counter. As usual, the line at the counter is long, so you enter and begin your wait. While waiting you notice that Klunker is offering a special deal on gas. They are selling gas for $1.579 per gallon. However, you must purchase a full tank when you rent the car. Klunker also says that the average price per gallon of gas in the LA area is $1.60. You are uncertain of several necessary pieces of information to determine whether you should take advantage of this deal. These are: First, you expect to drive between 150 and 250 miles on this trip. You believe there is an equal chance that you will drive either of these extreme amounts. However, you may have to make a side trip to Edwards AFB that will increase the total miles to 500. You believe there is a 1 in 5 chance that this will happen. Normally, Klunker rents you a mid-size car. You believe most cars in this class have either a 15 gallon gas tank with 60% confidence or a 18 gallon gas tank with 40% confidence. You've heard that cars in this class get as much as 25 mpg on the highway but may get as little as 18 mpg city driving. You decide there is an 70% chance most of your driving will be on the freeways and the rest in the city. Finally, you don't believe Klunker's posted average price of $1.60 per gallon in the LA area. You guess that there is 40% chance that the gas will be $1.259, 20% chance it will be $1.479 and a 40% chance it will be $1.659. Assume you must decide whether to pre-purchase the tank of gas prior to talking to a Klunker clerk. a.Draw the decision tree for this problem using Decision Tree in Excel. b.What is the optimal decision? c.Now suppose you can delay your decision until you speak to a clerk and find out exactly how much gas your rental car holds. The clerk says the car you will rent holds 18 gallons of gas. What is your optimal decision now? What is the value of this additional information?

The following questions are based on the information below. An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the investment decision problem. -Refer to Exhibit 14.9. Assume the formula =MAX(B5:C5) was entered in cell D5 and copied to cells D6:D8. What formula should go in cell E5 and get copied to cells E6:E8 to place a "<==" to indicate the choice according to the maximax decision rule?

Based on the radar chart of raw scores provided below, why is this decision complex?

Decision analysis supports all but one of the following goals. Which goal is not supported?

The decision with the smallest expected opportunity loss (EOL) will also have the

An investor is considering 4 investments, W, X, Y, and Z. The payoff from each investment is a function of the economic climate over the next 2 years. The economy can expand or decline. The following payoff matrix has been developed for the decision problem. The investor has estimated the probability of a declining economy at 80% and an expanding economy at 20%. -Refer to Exhibit 14.10. Complete the following table to determine the expected value of perfect information for the investor.