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Exam 7: Decision Analysis

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Question 21

True/False

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Expected monetary value gives the long-run average payoff if a large number of identical decisions could be made.

A) True
B) False

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Question 22

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The difference between expected payoff under certainty and expected payoff under risk is the:

A) expected monetary value.
B) expected value of perfect information.
C) expected net present value.
D) expected rate of return.
E) incremental rate of return

F) A) and B)
G) A) and C)

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Question 23

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Influence diagrams contain more detailed information than decision trees.

In an influence diagram,the circles show chance events.

A former politician,who is now the owner of an Ottawa consulting firm,is trying to decide whether to hire one,two,or three consultants.He estimates that profits next year (in thousands of dollars) will vary with demand for his consulting services as follows: If he feels the chances of low,medium,and high demand are 50%,20%,and 30%,respectively,what are the expected annual profits for the number of consultants he will decide to hire?

The owner of Tastee Cookies needs to decide whether to lease a small,medium,or large new retail outlet.She estimates that monthly profits will vary with demand for her cookies as follows: If she feels there is a 30% chance that demand will be high,what is her expected value of perfect information?

The local operations manager for the Canada Revenue Agency decides whether to hire one,two,or three temporary tax examiners for the upcoming tax season.She estimates that net revenues (in thousands of dollars) will vary with how well taxpayers comply with the new tax code just passed by Parliament,as follows: If she feels the chances of low,medium,and high compliance are 20%,30%,and 50%,respectively,what is her expected value of perfect information?

A structured approach to decision making is important because the intuitive quick approach does not consider all the relevant information and possible alternatives,and can be biased.

Decision trees are useful when there is more than one decision variable.

A manager's staff has compiled the information below which pertains to four capacity alternatives.Values in the matrix are present value in thousands of dollars. If states of nature are equally likely and an expected value criterion of maximization is used,which alternative would be chosen? A.

In a decision tree,square nodes represent chance events,and circular nodes denote decision points.

The construction manager for Acme Construction,Inc.must decide whether to build single-family homes,apartments,or condominiums.He estimates annual profits (in $000) will vary with the population trend as follows: If he feels the chances of declining,stable,and growing population trends are 40%,50%,and 10%,respectively,which kind of houses will he decide to build?

The owner of Tastee Cookies needs to decide whether to lease a small,medium,or large new retail outlet.She estimates that monthly profits will vary with demand for her cookies as follows: For what range of probability that demand will be high,will she decide to lease the small facility?

Testing how a problem solution reacts to changes in one or more of the model parameters in a decision problem is called:

Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book,they have a 50 percent chance of placing it with a major publisher,and it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80 percent chance of placing it with a smaller publisher,with ultimate sales of 30,000 copies.On the other hand,if they write a statistics book,they feel they have a 40 percent chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50 percent chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies.What is the expected value for the optimum decision alternative?

The owner of Tastee Cookies needs to decide whether to lease a small,medium,or large new retail outlet.She estimates that monthly profits will vary with demand for her cookies as follows: If she feels there is a 30% chance that demand will be high,what is her expected payoff with perfect information?

Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book,they have a 50 percent chance of placing it with a major publisher,and it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80 percent chance of placing it with a smaller publisher,with ultimate sales of 30,000 copies.On the other hand,if they write a statistics book,they feel they have a 40 percent chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50 percent chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies.What is the probability that the economics book would wind up being placed with a smaller publisher?

The owner of Tastee Cookies needs to decide whether to lease a small,medium,or large new retail outlet.She estimates that monthly profits will vary with demand for her cookies as follows: For what range of probability that demand will be high,will she decide to lease the medium facility?

Graphical sensitivity analysis is used when the payoffs and probabilities of decision alternatives are uncertain.

An advantage of decision trees compared to payoff tables is that they permit us to analyze situations involving sequential or multistage decisions.