Exam 21: Decision Analysis

Exhibit 21-4 Below you are given a payoff table involving two states of nature and three decision alternatives. The probability of the occurrence of S₁ = 0.3. -Refer to Exhibit 21-4.The expected value of perfect information is

The expected value of information that would tell the decision maker exactly which state of nature is going to occur is

Consider the following profit payoff table. What should the probabilities of S1 and S2 be so that the expected monetary values of the two decision alternatives equal one another?

Exhibit 21-4 Below you are given a payoff table involving two states of nature and three decision alternatives. The probability of the occurrence of S₁ = 0.3. -Refer to Exhibit 21-4.The expected monetary value of alternative C is

In computing an expected value (EV),the weights are

Exhibit 21-5 Below you are given a payoff table involving three states of nature and three decision alternatives. The probability of occurrence of S₁ is 0.2 and the probability of occurrence of S₂ is 0.3. -Refer to Exhibit 21-5.The recommended decision alternative based on the expected monetary value is

You are given the following payoff table. Assume the following probability information is given. a.Find the values of P(I₁)and P(I₂). b.Determine the values of P(S₁|I₁),P(S₂|I₁),P(S₁|I₂),and P(S₂|I₂). c.Use the decision tree approach and determine the optimal strategy.What is the expected value of your solution?

The probabilities of states of nature after revising the prior probabilities based on given indicator information are

Assume you have a sum of money available that you would like to invest in one of the three available investment plans: stocks,bonds,or money market.The conditional payoffs of each plan under two possible economic conditions are shown below.The probability of the occurrence of economic condition I is 0.28. a.Compute the expected value of the three investment options.Which investment option would you select,based on the expected values? b.Compute the expected value with perfect information (i.e. ,expected value under certainty). c.Compute the expected value of perfect information (EVPI).

The result obtained when a decision alternative is chosen and a chance event occurs is known as

An automobile manufacturer must make an immediate decision on the car size that should account for the majority of the firm's production two years from now.The firm perceives three possible states of nature at that time: S1,gasoline will be rationed;S2,gasoline will be readily available at close to current prices;and S3,gasoline will be readily available,but at much higher prices.The firm has determined the following profit payoff table (in $1,000s). a.An economist at the auto company has advised the firm that the probabilities of the states of nature are P(S₁)= .2,P(S₂)= .5,and P(S₃)= .3.Find the expected monetary value for the three decisions. b.Which decision should be chosen under the expected monetary value criterion? c.Determine the expected value of perfect information.

Exhibit 21-1 Below you are given a payoff table involving two states of nature and three decision alternatives. The probability of occurrence of S₁ = 0.2. -Refer to Exhibit 21-1.The recommended decision alternative based on the expected monetary value is

Assume you are faced with the following decision alternatives and two states of nature.The payoff table is shown below. Assume the states of nature have the following probabilities. a.Determine the expected value of each alternative and indicate which decision alternative is the best. b.Determine the expected value of perfect information.

Future events that cannot be controlled by the decision maker are called

Exhibit 21-2 Below you are given a payoff table involving three states of nature and two decision alternatives. The probability that S₁ will occur is 0.1;the probability that S₂ will occur is 0.6. -Refer to Exhibit 21-2.The expected value of perfect information equals

Nodes indicating points where a decision is made are known as

The difference between the expected value of an optimal strategy based on sample information and the "best" expected value without any sample information is called the

A tabular presentation of the expected gain from the various options open to a decision maker is called

Assume you have a sum of money available that you would like to invest in one of the two available investment plans: stocks or bonds.The conditional payoffs of each plan under two possible economic conditions are as follows. a.If the probability of Economic Condition I occurring is 0.8,where should you invest your money? Use the expected monetary value criterion and show your complete work. b.Compute the expected value with perfect information about the economic conditions (expected value under certainty). c.Determine expected value of perfect information (EVPI).

Suppose we are interested in investing in one of three investment opportunities: d₁,d₂,or d₃.The following profit payoff table shows the profits (in thousands of dollars)under each of the 3 possible economic conditions-S₁,S₂,and S₃. Assume the states of nature have the following probabilities of occurrence. a.Determine the expected value of each alternative and indicate which decision alternative is the best. b.Determine the expected value with perfect information about the states of nature. c.Determine the expected value of perfect information.