Chapter 13 Decision Analysis Test Bank

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Chapter 13 Decision Analysis Test Bank
数据模型与决策 (Wuhan University)
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Chapter 13 - Decision Analysis

True / False
1. Sample information with an efficiency rating of 100% is perfect information.

a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Efficiency of sample information
2. States of nature should be defined so that one and only one will actually occur.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Structuring the decision
process
3. Decision alternatives are structured so that several could occur simultaneously.

a. True
b. Fals
e
ANSWER: False
POINTS: 1
TOPICS: Structuring the decision problem
4. Square nodes in a decision tree indicate that a decision must be made.

a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Decision
trees
5. Circular nodes in a decision tree indicate that it would be incorrect to choose a path from the node.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Decision
trees
6. Risk analysis helps the decision maker recognize the difference between the expected value of a decision alternative
and the payoff that may actually occur.
Cengage Learning Testing, Powered by Cognero Page 1

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a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Risk
analysis
7. The expected value of an alternative can never be negative.

a. True
b. Fals
e
ANSWER: False
POINTS: 1
TOPICS: Decision making with
probabilities
8. Expected value is the sum of the weighted payoff possibilities at a circular node in a decision tree.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
probabilities
9. EVPI is always greater than or equal to EVSI.

a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Expected value of sample information
10. After all probabilities and payoffs are placed on a decision tree, the decision maker calculates expected values at state
of nature nodes and makes selections at decision nodes.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Developing a decision
strategy
11. A decision strategy is a sequence of decisions and chance outcomes, where the decisions chosen depend on the yet to
be determined outcomes of chance events.
a. True

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b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Decision
strategy
12. EVPI equals the expected regret associated with the minimax decision.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Minimax regret
approach
13. The expected value approach is more appropriate for a one-time decision than a repetitive decision.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
probabilities
14. Maximizing the expected payoff and minimizing the expected opportunity loss result in the same recommended
decision.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Minimax regret
approach
15. The expected value of sample information can never be less than the expected value of perfect information.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
16. The minimum expected opportunity loss provides the best decision, regardless of whether the decision analysis
involves minimization or maximization.
a. True
b. Fals

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e
ANSWER: True
POINTS: 1
TOPICS: Opportunity
loss
17. The primary value of decision trees is as a useful way of organizing how operations managers think about complex
multiphase decisions.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Decision
trees
18. A high efficiency rating indicates that the sample information is almost as good as perfect information.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
19. When the expected value approach is used to select a decision alternative, the payoff that actually occurs will usually
have a value different from the expected value.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
probabilities
20. The decision alternative with the best expected monetary value will always be the most desirable decision.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
TOPICS: Meaning of
utility
21. When monetary value is not the sole measure of the true worth of the outcome to the decision maker, monetary value
should be replaced by utility.
a. True
b. Fals

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e
ANSWER: True
POINTS: 1
TOPICS: Meaning of
utility
22. The outcome with the highest payoff will also have the highest utility.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Developing utilities for monetary
payoffs
23. Expected utility is a particularly useful tool when payoffs stay in a range considered reasonable by the decision maker.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
TOPICS: Meaning of
utility
24. To assign utilities, consider the best and worst payoffs in the entire decision situation.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
payoffs
25. A risk avoider will have a concave utility function.

a. True
b. Fals
e
ANSWER: True
POINTS: 1
payoffs
26. The expected utility is the utility of the expected monetary value.
a. True
b. Fals
e
ANSWER: False

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POINTS: 1
TOPICS: Expected utility
approach
27. The risk premium is never negative for a conservative decision maker.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
payoffs
28. The risk neutral decision maker will have the same indications from the expected value and expected utility
approaches.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Expected monetary value versus expected utility
29. The utility function for a risk avoider typically shows a diminishing marginal return for money.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
payoffs
30. The expected monetary value approach and the expected utility approach to decision making usually result in the same
decision choice unless extreme payoffs are involved.
a. True
b. Fals
e
ANSWER: True
POINTS: 1
TOPICS: Utility and decision
making
31. A risk neutral decision maker will have a linear utility function.
a. True
b. Fals
e
ANSWER: True
POINTS: 1

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payoffs
32. Given two decision makers, one risk neutral and the other a risk avoider, the risk avoider will always give a lower
utility value for a given outcome.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
payoffs
33. When the payoffs become extreme, most decision makers are satisfied with the decision that provides the best
expected monetary value.
a. True
b. Fals
e
ANSWER: False
POINTS: 1
TOPICS: Meaning of
utility
Multiple Choice
34. The options from which a decision maker chooses a course of action are
a. called the decision alternatives.
b. under the control of the decision
maker.
c. not the same as the states of nature.
d. All of the alternatives are true.
ANSWER: d
POINTS: 1
35. States of nature

a. can describe uncontrollable natural events such as floods or freezing
temperatures.
b. can be selected by the decision maker.
c. cannot be enumerated by the decision maker.
ANSWER: a
POINTS: 1
36. A payoff
a. is always measured in profit.

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b. is always measured in cost.
c. exists for each pair of decision alternative and state of
nature.
d. exists for each state of nature.
ANSWER: c
POINTS: 1
TOPICS: Payoff tables
37. Making a good decision

a. requires probabilities for all states of nature.
b. requires a clear understanding of decision alternatives, states of nature, and
payoffs.
c. implies that a desirable outcome will occur.
ANSWER: b
POINTS: 1
TOPICS: Decision making without probabilities
38. A decision tree

a. presents all decision alternatives first and follows them with all states of nature.
b. presents all states of nature first and follows them with all decision alternatives.
c. alternates the decision alternatives and states of nature.
d. arranges decision alternatives and states of nature in their natural chronological
order.
ANSWER: d
POINTS: 1
TOPICS: Decision
trees
39. Which of the methods for decision making best protects the decision maker from undesirable results?
a. the optimistic approach
b. the conservative
approach
c. minimum regret
d. minimax regret
ANSWER: b
POINTS: 1
TOPICS: Conservative approach
40. Sensitivity analysis considers

a. how sensitive the decision maker is to
risk.
b. changes in the number of states of nature.
c. changes in the values of the payoffs.
d. changes in the available alternatives.

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ANSWER: c
POINTS: 1
TOPICS: Sensitivity
analysis
41. To find the EVSI,

a. use the EVPI to calculate sample information probabilities.
b. use indicator probabilities to calculate prior probabilities.
c. use prior and sample information probabilities to calculate revised
probabilities.
d. use sample information to revise the sample information probabilities.
ANSWER: c
POINTS: 1
42. If P(high) = .3, P(low) = .7, P(favorable | high) = .9, and P(unfavorable | low) = .6, then P(favorable) =
a. .10
b. .27
c. .30
d. .55
ANSWER: d
POINTS: 1
TOPICS: Conditional
probability
43. The efficiency of sample information is

a. EVSI*(100%)
b. EVSI/EVPI*(100%)
c. EVwoSI/
EVwoPI*(100%)
d. EVwSI/EVwoSI*(100%)
ANSWER: b
POINTS: 1
44. Decision tree probabilities refer to

a. the probability of finding the optimal strategy
b. the probability of the decision being made
c. the probability of overlooked choices
d. the probability of an uncertain event
occurring
ANSWER: d
POINTS: 1
TOPICS: Decision
trees

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45. For a maximization problem, the conservative approach is often referred to as the
a. minimax approach.
b. maximin approach.
c. maximax
approach.
d. minimin approach.
ANSWER: b
POINTS: 1
46. For a minimization problem, the optimistic approach is often referred to as the
a. minimax approach
b. maximin approach
c. maximax
approach
d. minimin approach
ANSWER: d
POINTS: 1
47. For a maximization problem, the optimistic approach is often referred to as the
a. minimax approach
b. maximin approach
c. maximax
approach
d. minimin approach
ANSWER: c
POINTS: 1
48. For a minimization problem, the conservative approach is often referred to as the
a. minimax approach
b. maximin approach
c. maximax
approach
d. minimin approach
ANSWER: a
POINTS: 1
49. In an influence diagram, decision nodes are represented by

a. circles or ovals
b. squares or
rectangles
c. diamonds

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d. triangles
ANSWER: b
POINTS: 1
TOPICS: Influence diagram
50. Which of the following approaches to decision making requires knowledge of the probabilities of the states of nature?
a. minimax
regret
b. maximin
c. expected value
d. conservative
ANSWER: c
POINTS: 1
probabilities
51. Decision tree probabilities refer to the probability of

a. an uncertain event
occurring.
b. the decision being made.
c. finding an optimal value.
d. overlooked choices.
ANSWER: a
POINTS: 1
probabilities
52. Which of the following is not an advantage of using decision tree analysis?
a. the ability to see clearly what decisions must be made
b. the ability to see clearly in what sequence the decisions must
occur
c. the ability to see clearly the interdependence of decisions
d. the ability to see clearly the future outcome of a decision
ANSWER: d
POINTS: 1
probabilities
53. A decision tree provides

a. a heuristic method for analyzing decisions.
b. a deterministic approach to decision analysis.
c. the absolute value of the decision.
d. an objective way of determining the relative value of each decision
alternative.
ANSWER: d
POINTS: 1

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TOPICS: Decision
trees
54. The approach to determining the optimal decision strategy involves

a. a forward (left to right) pass through the decision tree.
b. a backward (right to left) pass through the decision tree.
c. choosing the outcome of a chance event with the greatest
probability.
d. choosing the outcome of a chance event with the greatest payoff.
ANSWER: b
POINTS: 1
TOPICS: Decision
strategy
55. 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. information sensitivity.
b. expected value of sample
information.
c. expected value of perfect information.
d. efficiency of sample information.
ANSWER: b
POINTS: 1
56. When consequences are measured on a scale that reflects a decision maker's attitude toward profit, loss, and risk,
payoffs are replaced by
a. utility values.
b. multicriteria measures.
c. sample information.
d. opportunity loss.
ANSWER: a
POINTS: 1
TOPICS: Meaning of
utility
57. The purchase of insurance and lottery tickets shows that people make decisions based on
a. expected value.
b. sample information.
c. utility.
d. maximum
likelihood.
ANSWER: c
POINTS: 1
TOPICS: Meaning of
utility

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58. The expected utility approach

a. does not require probabilities.
b. leads to the same decision as the expected value approach.
c. is most useful when excessively large or small payoffs are
possible.
d. requires a decision tree.
ANSWER: c
POINTS: 1
TOPICS: Expected utility
approach
59. Utility reflects the decision maker's attitude toward

a. probability and profit.
b. profit, loss, and risk.
c. risk and regret.
d. probability and
regret.
ANSWER: b
POINTS: 1
TOPICS: Meaning of
utility
60. Values of utility

a. must be between 0 and 1.
b. must be between 0 and 10.
c. must be nonnegative.
d. must increase as the payoff
improves.
ANSWER: d
POINTS: 1
TOPICS: Utility
functions
61. If the payoff from outcome A is twice the payoff from outcome B, then the ratio of these utilities will be
a. 2 to 1.
b. less than 2 to 1.
c. more than 2 to 1.
d. unknown without further
information.
ANSWER: d
POINTS: 1
TOPICS: Utility
functions
62. The probability for which a decision maker cannot choose between a certain amount and a lottery based on that

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probability is
a. the indifference
probability.
b. the lottery probability.
c. the uncertain probability.
d. the utility probability.
ANSWER: a
POINTS: 1
TOPICS: Utility
functions
63. A decision maker has chosen .4 as the probability for which he cannot choose between a certain loss of 10,000 and the
lottery p(-25000) + (1 - p)(5000). If the utility of -25,000 is 0 and of 5000 is 1, then the utility of -10,000 is
a. .5
b. .6
c. .4
d. 4
ANSWER: b
POINTS: 1
TOPICS: Utility
functions
64. When the decision maker prefers a guaranteed payoff value that is smaller than the expected value of the lottery, the
decision maker is
a. a risk
avoider.
b. a risk taker.
c. an optimist.
d. an optimizer.
ANSWER: a
POINTS: 1
TOPICS: Risk avoiders versus risk
takers
65. A decision maker whose utility function graphs as a straight line is

a. conservative.
b. a risk taker.
c. risk neutral.
d. a risk
avoider.
ANSWER: c
POINTS: 1
takers
66. When the utility function for a risk-neutral decision maker is graphed (with monetary value on the horizontal axis and

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utility on the vertical axis), the function appears as
a. a convex curve.
b. a concave curve.
c. an 'S' curve.
d. a straight line.
ANSWER: d
POINTS: 1
takers
Subjective Short Answer
67. Jim has been employed at Gold Key Realty at a salary of $2,000 per month during the past year. Because Jim is
considered to be a top salesman, the manager of Gold Key is offering him one of three salary plans for the next year: (1) a
25% raise to $2,500 per month; (2) a base salary of $1,000 plus $600 per house sold; or, (3) a straight commission of
$1,000 per house sold. Over the past year, Jim has sold up to 6 homes in a month.
a. Compute the monthly salary payoff table for Jim.
b. For this payoff table find Jim's optimal decision using: (1) the conservative approach, (2)
minimax regret approach.
c. Suppose that during the past year the following is Jim's distribution of home sales. If one
assumes that this a typical distribution for Jim's monthly sales, which salary plan should Jim
select?
Home Sales Number of Months

0 1
1 2
2 1
3 2
4 1
5 3
6 2
ANSWER
: a. There are three decision alternatives (salary plans) and seven states of nature
(the number of houses sold monthly).
PAYOFF Number of Homes Sold
TABLE
0 1 2 3 4 5 6
Salary 2500 2500 2500 2500 2500 2500 2500
Plan I
Salary 1000 1600 2200 2800 3400 4000 4600
Plan II
Salary 0 1000 2000 3000 4000 5000 6000
Plan III
b. (1) Conservative Approach (Maximin): Plan I

REGRET Number of Homes Sold
TABLE
0 1 2 3 4 5 6
Salary 0 0 0 500 1500 2500 3500
Plan I
Salary 1500 900 300 200 600 1000 1400

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Plan II
Salary 2500 1500 500 0 0 0 0
Plan III
(2) Minimax Regret Approach: Plan II
c. Use the relative frequency method for determining the probabilities.

Using the EV approach: EV(Plan I) = 2500, EV(Plan II) = 3050, EV(Plan
III) = 3417;
Choose Plan III.
POINTS: 1
TOPICS: Decision making with and without probabilities
68. East West Distributing is in the process of trying to determine where they should schedule next year's production of a
popular line of kitchen utensils that they distribute. Manufacturers in four different countries have submitted bids to East
West. However, a pending trade bill in Congress will greatly affect the cost to East West due to proposed tariffs, favorable
trading status, etc.
After careful analysis, East West has determined the following cost breakdown for the four manufacturers (in $1,000's)
based on whether or not the trade bill passes:
Bill Passes Bill Fails
Country A 260 210
Country B 320 160
Country C 240 240
Country D 275 210
If East West estimates that there is a 40% chance of the bill passing, which country should
a.
they choose for manufacturing?
b. Over what range of values for the "bill passing" will the solution in part (a) remain optimal?
ANSWER
: Using EV approach: EV(A) = 230, EV(B) = 224, EV(C) = 240; Choose Country B
a.
(lowest EV)
b As long as the probability of the bill passing is less than .455, East West should choose
. Country B.

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POINTS: 1
TOPICS: Decision making with probabilities
69. Transrail is bidding on a project that it figures will cost $400,000 to perform. Using a 25% markup, it will charge
$500,000, netting a profit of $100,000. However, it has been learned that another company, Rail Freight, is also
considering bidding on the project. If Rail Freight does submit a bid, it figures to be a bid of about $470,000. Transrail
really wants this project and is considering a bid with only a 15% markup to $460,000 to ensure winning regardless of
whether or not Rail Freight submits a bid.
a. Prepare a profit payoff table from Transrail's point of view.
b. What decision would be made if Transrail were conservative?
If Rail Freight is known to submit bids on only 25% of the projects it considers, what
c.
decision should Transrail make?
Given the information in (c), how much would a corporate spy be worth to Transrail to find
d.
out if Rail Freight will bid?
ANSWER
: a. Rail Freight
Transrail Bid $470,000 Doesn't Bid
Bid $500,000 $0 $100,000
Bid $460,000 $60,000 $ 60,000
b. Bid $460,000
c. Bid $500,000
d. $15,000
POINTS: 1
70. The Super Cola Company must decide whether or not to introduce a new diet soft drink. Management feels that if it
does introduce the diet soda it will yield a profit of $1 million if sales are around 100 million, a profit of $200,000 if sales
are around 50 million, or it will lose $2 million if sales are only around 1 million bottles. If Super Cola does not market
the new diet soda, it will suffer a loss of $400,000.
a. Construct a payoff table for this problem.
b. Construct a regret table for this problem.
c. Should Super Cola introduce the soda if the company: (1) is conservative; (2) is optimistic;

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(3) wants to minimize its maximum disappointment?
An internal marketing research study has found P(100 million in sales) = 1/3; P(50 million in
d.
sales) = 1/2; P(1 million in sales) = 1/6. Should Super Cola introduce the new diet soda?
A consulting firm can perform a more thorough study for $275,000. Should management
e.
have this study performed?
ANSWER
: PAYOFF
a. Sales ($millions)
TABLE
100 50 1
Introduce $1,000,000 $200,000 −$2,000,000
Do Not
−$400,000 −$400,000 −$400,000
Introduce
REGRET
b. Sales ($millions)
TABLE
100 50 1
Introduce $0 $0 $1,600,000
Do Not
$1,400,000 $600,000 $0
Introduce
c. (1) do not introduce; (2) introduce; (3) do not introduce

d. Yes
e. No
POINTS: 1
71. Super Cola is also considering the introduction of a root beer drink. The company feels that the probability that the
product will be a success is .6. The payoff table is as follows:
Success (s1) Failure (s2)

Produce (d1) $250,000 −$300,000
Do Not Produce (d2) −$ 50,000 −$ 20,000
The company has a choice of two research firms to obtain information for this product. Stanton Marketing has market
indicators, I1 and I2 for which P(I1 | s1) = .7 and P(I1 | s2) = .4. New World Marketing has indicators J1 and J2 for which
P(J1 | s1) = .6 and P(J1 | s2) = .3.
a. What is the optimal decision if neither firm is used? Over what probability of success range
is this decision optimal?
b. What is the EVPI?
c. Find the EVSIs and efficiencies for Stanton and New World.
d. If both firms charge $5,000, which firm should be hired?
e. If Stanton charges $10,000 and New World charges $4,000, which firm should Super Cola
hire? Why?
ANSWER
: a. Introduce root beer; p ≤ .483
b. EVPI = $112,000
NOTE: The answers to (c)-(e) are very sensitive to roundoff error.
Figures in parentheses are for two decimal places only.
c. Stanton: EVSI = $13,200 ($11,862)
Efficiency = .118 (.106)
New World: EVSI = $6,400 ($6,424)

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Efficiency = .057 (.057)
d. Hire Stanton (Stanton)
e. Hire New World (Stanton)
POINTS: 1
TOPICS: Computing branch probabilities
72. Dollar Department Stores has just acquired the chain of Wenthrope and Sons Custom Jewelers. Dollar has received an
offer from Harris Diamonds to purchase the Wenthrope store on Grove Street for $120,000. Dollar has determined
probability estimates of the store's future profitability, based on economic outcomes, as: P($80,000) = .2,
P($100,000) = .3, P($120,000) = .1, and P($140,000) = .4.
a. Should Dollar sell the store on Grove Street?
Dollar can have an economic forecast performed, costing $10,000, that produces indicators
c. I1 and I2, for which P(I1 | 80,000) = .1; P(I1 | 100,000) = .2; P(I1 | 120,000) = .6; P(I1 |
140,000) = .3. Should Dollar purchase the forecast?
ANSWER
: a. Yes, Dollar should sell store
b. EVPI = $8,000
c. No; survey cost exceeds EVPI
POINTS: 1
73. An appliance dealer must decide how many (if any) new microwave ovens to order for next month. The ovens cost
$220 and sell for $300. Because the oven company is coming out with a new product line in two months, any ovens not
sold next month will have to be sold at the dealer's half price clearance sale. Additionally, the appliance dealer feels he
suffers a loss of $25 for every oven demanded when he is out of stock. On the basis of past months' sales data, the dealer
estimates the probabilities of monthly demand (D) for 0, 1, 2, or 3 ovens to be .3, .4, .2, and .1, respectively.
The dealer is considering conducting a telephone survey on the customers' attitudes towards microwave ovens. The results
of the survey will either be favorable (F), unfavorable (U) or no opinion (N). The dealer's probability estimates for the
survey results based on the number of units demanded are:
P(F | D = 0) = .1 P(F | D = 2) = .3 P(U | D = 0) = .8 P(U | D = 2) = .1

P(F | D = 1) = .2 P(F | D = 3) = .9 P(U | D = 1) = .3 P(U | D = 3) = .1
a. What is the dealer's optimal decision without conducting the survey?

c. Based on the survey results what is the optimal decision strategy for the dealer?
d. What is the maximum amount he should pay for this survey?
ANSWER
: Demand For Ovens
Ovens Ordered 0 1 2 3
0 0 −25 −50 −75
1 −70 80 55 30
2 −140 10 160 135
3 −210 −60 90 240
a. Order one oven: EV = $25.00

b. EVPI = $63.00
c. Favorable: order 2; Unfavorable: order 0; No opinion: order 1
d. EVSI = $9.10

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POINTS: 1
74. Lakewood Fashions must decide how many lots of assorted ski wear to order for its three stores. Information on
pricing, sales, and inventory costs has led to the following payoff table, in thousands.
Demand
Order Size Low Medium High
1 lot 12 15 15
2 lots 9 25 35
3 lots 6 35 60
a. What decision should be made by the optimist?

b. What decision should be made by the conservative?
c. What decision should be made using minimax regret?
ANSWER
: a. 3 lots
b. 1 lot
c. 3 lots
Regret Table
Order Demand Maximum

Size Low Medium High Regret
1 lot 0 20 45 45
2 lots 3 10 25 25
3 lots 6 0 0 6
POINTS: 1
75. The table shows both prospective profits and losses for a company, depending on what decision is made and what
state of nature occurs. Use the information to determine what the company should do.
State of Nature
Decision s1 s2 s3
d1 30 80 -30
d2 100 30 -40
d3 -80 -10 120
d4 20 20 20
a. if an optimistic strategy is used.

b. if a conservative strategy is used.
c. if minimax regret is the strategy.
ANSWER
: a. d3
b. d1
c. d4
Regret Table:
State of Nature Maximum

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Decision s1 s2 s3 Regret
d1 70 0 150 150
d2 0 50 160 160
d3 180 90 0 180
d4 80 60 100 100
POINTS: 1
76. A payoff table is given as
State of Nature
Decision s1 s2 s3
d1 10 8 6
d2 14 15 2
d3 7 8 9
a. What decision should be made by the optimistic decision maker?

b. What decision should be made by the conservative decision maker?
c. What decision should be made under minimax regret?
d. If the probabilities of s1, s2, and s3 are .2, .4, and .4, respectively, then what decision should
be made under expected value?
e. What is the EVPI?
ANSWER
: a. d2
b. d3
c. a three way tie
d. EV(d1) = 7.6
EV(d2) = 9.6 (the best)
EV(d3) = 8.2
e. EVPI = 12.4 − 9.6 = 2.8
POINTS: 1
77. A payoff table is given as
State of Nature
Decision s1 s2 s3
d1 250 750 500
d2 300 -250 1200
d3 500 500 600
a. What choice should be made by the optimistic decision maker?

b. What choice should be made by the conservative decision maker?
c. What decision should be made under minimax regret?
d. If the probabilities of d1, d2, and d3 are .2, .5, and .3, respectively, then what choice should
be made under expected value?
e. What is the EVPI?

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ANSWER
: a. d2
b. d3
c. d1
d. EV(d1) = 695 (the best)
EV(d2) = 385
EV(d 3) = 500
e. EVPI = 925 − 695 = 230
POINTS: 1
78. A decision maker has developed the following decision tree. How sensitive is the choice between N and P to the
probabilities of states of nature U and V?
ANSWER: Choose N if p ≤ .78.
POINTS: 1
TOPICS: Sensitivity analysis
79. If p is the probability of Event 1 and (1 − p) is the probability of Event 2, for what values of p would you choose A?
B? C? Values in the table are payoffs.
Choice/Event Event 1 Event 2
A 0 20
B 4 16
C 8 0
ANSWER: Choose A if p ≤ .5, choose B is .5 ≤ p ≤ .8, and choose C if p
≥ .8.
POINTS: 1
80. Fold back the decision tree and state what strategy should be followed.

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ANSWER:


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Strategy: Select A. If C happens, select H. If D happens, you are done. If E happens,
select K.
POINTS: 1
TOPICS: Expected value and decision trees
81. Fold back this decision tree. Clearly state the decision strategy you determine.
ANSWER:
Choose A. If F happens, choose K.

POINTS: 1
82. If sample information is obtained, the result of the sample information will be either positive or negative. No matter
which result occurs, the choice to select option A or option B exists. And no matter which option is chosen, the eventual
outcome will be good or poor. Complete the table.
Sample States of Prior Conditional Joint Posterior

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Result Nature Probabilities Probabilities Probabilities Probabilities
Positive good .7 P(positive | good) = .8
poor .3 P(positive | poor) = .1
Negative good .7 P(negative | good) =
poor .3 P(negative | poor) =
ANSWER
: Sample States of Prior Conditional Joint Posterior
Result Nature Probabilities Probabilities Probabilities Probabilities
P(positive | good)
Positive good .7 .56 .9492
= .8
P(positive | poor)
poor .3 .03 .0508
= .1
P(negative | good)
Negative good .7 .14 .3415
= .2
P(negative | poor)
poor .3 .27 .6585
= .9
POINTS: 1
TOPICS: Posterior probabilities
83. Use graphical sensitivity analysis to determine the range of values of the probability of state of nature s 1 over which
each of the decision alternatives has its largest expected value.
State of Nature
Decision s1 s2
d1 8 10
d2 4 16
d3 10 0
ANSWER EV(d1) and EV(d2) intersect at p = .6. EV(d1) and EV(d3) intersect at p = .8333.
:
Therefore when 0 ≤ p ≤ .6, choose d2. When .6 ≤ p ≤ .8333, choose d1. When p
≥ .8333, choose d3.
POINTS: 1
TOPICS: Graphical sensitivity analysis
84. Dollar Department Stores has received an offer from Harris Diamonds to purchase Dollar's store on Grove Street for
$120,000. Dollar has determined probability estimates of the store's future profitability, based on economic outcomes, as:
P($80,000) = .2, P($100,000) = .3, P($120,000) = .1, and P($140,000) = .4.
a. Should Dollar sell the store on Grove Street?

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Dollar can have an economic forecast performed, costing $10,000, that produces indicators
c. I1 and I2, for which P(I1 | 80,000) = .1; P(I1 | 100,000) = .2; P(I1 | 120,000) = .6; P(I1 |
140,000) = .3. Should Dollar purchase the forecast?
ANSWER
: a. Yes, Dollar should sell store.
b. EVPI = $8,000
c. No; survey cost exceeds EVPI.
POINTS: 1
TOPICS: Posterior probabilities
85. Characterize each of the non-probabilistic approaches to decision making (i.e. - minimin, minimax, maximin, and
maximax) in terms of it relating to a minimization or maximization problem and whether it is a pessimistic or optimistic
approach.
ANSWER: Answer not provided.
POINTS: 1
86.
A paint company has three sources for buying bright red pigment for their paints: Vietnam, Taiwan, or Thailand.
Unfortunately, the pigment is made from a bush whose annual growth is heavily dependent upon the amount of rainfall
during the growing season. The tables below show probabilities and prices for wet, dry and normal growing seasons:
Probabilities
Wet Dry Normal
Vietnam .5 .2 .3
Taiwan .6 .3 .1
Thailand .4 .4 .2
Price/Pound ($)
Wet Dry Normal
Vietnam .95 1.10 1.00
Taiwan .85 1.20 .98
Thailand .90 1.15 1.05
What country should the company select and what is the expected value (price) associated with it?
ANSWER:
EV (Vietnam) = .5(.95) + .2(l.10) + .3(1.00) = $.995
EV (Taiwan) = .6(.85) + .3(l.20) + .1(.98) = $.968
EV (Thailand) = .4(.90) + .4(1.15) + .2(l.05) = $1.03
Select Taiwan, because it has the lowest EV.

POINTS: 1
87.
A regional fast-food restaurant is considering an expansion program. The major factor influencing the success of such a
program is the future level of interest rates. It is estimated that there is a 20 percent chance that interest rates will increase
by 2 percentage points, a 50 percent chance that they will remain the same, and a 30 percent chance that they will
decrease by 2 percentage points. The alternatives they are considering and possible payoffs are shown in the table below.
Which alternative is best, based on expected value?

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Rates up Rates Rates down
2 percent unchanged 2 percent
Build 50 restaurants -$200,000 $50,000 $150,000
Build 25 restaurants -$115,000 $26,000 $80,000
Do nothing -$70,000 0 $5,000
ANSWER:
EV (A--50 restaurants) = .2(-200,000) + .5(50,000) + .3(150,000) = $30,000
EV (B--25 restaurants) = .2(-115,000) + .5(26,000) + .3(80,000) = $14,000
EV (C--do nothing) = .2(-70,000) + .5(0) + .3(5,000) = -$12,500
The company should build 50 restaurants; EV of $30,000
POINTS: 1
88. A chemical company is trying to decide whether to build a pilot plant now for a new chemical process or to build the
full plant now. If they build a pilot plant now, they could expand it later to a full plant or license the plant to another
company. It would cost them $2 million to build the pilot plant and another $2 million later to expand it. If they build the
full plant now it would cost $3.5 million to construct.
The returns they expect to get from the full production plant depend upon the market. They estimate there is a 60% chance
the market will be robust, a 30% chance it will remain stable, and a 10% chance it will become stagnate. The returns are
estimated to be $5 million if it is robust, $3 million if it is stable, and $1 million if it is stagnate.
Before they expand the pilot plant, they plan to conduct a comprehensive study. Based on past experience, they expect the
study to report a 60% chance of favorable outcome for expansion and a 40% unfavorable chance. In either case they will
have to decide whether to expand to a full plant or license the pilot plant. If the report is favorable and they license it, they
expect to get $3 million. However, if the report is unfavorable and they license it, they will only get $1 million.
Develop a decision tree for this problem and determine the optimal decision strategy.
ANSWER
:

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Company should build pilot plant. If report is unfavorable, company should expand. If report is favorable,
company should license. EV of $600,000.
POINTS: 1
89.
A manufacturing company is considering expanding its production capacity to meet a growing demand for its product line
of air fresheners. The alternatives are to build a new plant, expand the old plant, or do nothing. The marketing
department estimates a 35 percent probability of a market upturn, a 40 percent probability of a stable market, and a 25
percent probability of a market downturn. Georgia Swain, the firm's capital appropriations analyst, estimates the
following annual returns for these alternatives:

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Market Stable Market

Upturn Market Downturn
Build new plant $690,000 $(130,000) $(150,000)
Expand old plant 490,000 (45,000) (65,000)
Do nothing 50,000 0 (20,000)
a. Use a decision tree analysis to analyze these decision alternatives.

b. What should the company do?
c. What returns will accrue to the company if your recommendation is followed?
ANSWER:
a.
b. Decision: Build the new plant

c. Returns to accrue: $690,000; ($130,000); or ($150,000)
POINTS: 1
90.
The Sunshine Manufacturing Company has developed a unique new product and must now decide between two facility
plans. The first alternative is to build a large new facility immediately. The second alternative is to build a small plant
initially and to consider expanding it to a larger facility three years later if the market has proven favorable.
Marketing has provided the following probability estimates for a ten-year plan:
First 3-Year Demand Next 7-Year Demand Probability

Unfavorable Unfavorable .2
Unfavorable Favorable .0
Favorable Favorable .7

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Favorable Unfavorable .1
If the small plant is expanded, the probability of demands over the remaining seven years is 7/8 for favorable and 1/8 for
unfavorable. The accounting department has provided the payoff for each outcome:
Demand Facility Plan Payoff

Favorable, favorable 1 $5,000,000
Favorable, unfavorable 1 2,500,000
Unfavorable, unfavorable 1 1,000,000
Favorable, favorable 2--expanded 4,000,000
Favorable, unfavorable 2--expanded 100,000
Favorable, favorable 2--not expanded 1,500,000
Favorable, unfavorable 2--not expanded 500,000
Unfavorable, unfavorable 2--not expanded 300,000
With these estimates, analyze Sunshine's facility decision and:
a. Perform a complete decision tree analysis.

b. Recommend a strategy to Sunshine.
c. Determine what payoffs will result from your recommendation.
ANSWER
: a.
b. Recommended strategy: Build the large plant

c. Possible payoffs that will result: $5,000,000; $2,500,000; or $1,000,000
POINTS: 1

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91.
A Pacific Northwest lumber company is considering the expansion of one of its mills. The question is whether to do it
now, or wait for one year and re-consider. If they expand now, the major factors of importance are the state of the
economy and the level of interest rates. The combination of these two factors results in five possible situations. If they do
not expand now, only the state of the economy is important and three conditions characterize the possibilities. The
following table summarizes the situation:
Probabilities Revenues
Expand
very favorable .2 $80,000
favorable .2 $60,000
neutral .1 $20,000
unfavorable .3 -$20,000
very unfavorable .2 -$30,000
Don't expand
expansion .2 $50,000
steady .5 $30,000
contraction .3 $10,000
a. Draw the decision tree for this problem.

b. What is the expected value for expanding?
c. What is the expected value for not expanding?
d. Based on expected value, what should the company’s decision(s) be?
ANSWER:
a.
b. EV(Expanding) = 2(80,000) + .2(60,000) + .1(20,000)

+ .3(-20,000) + .2(-30,000) = $18,000
c. EV(Not Expanding) = 2(50,000) + .5(30,000) + .3(10,000) = $28,000
d. Do not expand
POINTS: 1
92.

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For the payoff table below, the decision maker will use P(s1) = .15, P(s2) = .5, and P(s3) = .35.
State of Nature
Decision s1 s2 s3
d1 -5000 1000 10,000
d2 -15,000 -2000 40,000
a. What alternative would be chosen according to expected value?

b. For a lottery having a payoff of 40,000 with probability p and -15,000 with probability
(1 - p), the decision maker expressed the following indifference probabilities.
Payoff Probability
10,000 .85
1000 .60
-2000 .53
-5000 .50
Let U(40,000) = 10 and U(-15,000) = 0 and find the utility value for each payoff.
c. What alternative would be chosen according to expected utility?
ANSWER
: a. EV(d1) = 3250 and EV(d2) = 10750, so choose d2.
b. Payoff Probability Utility
10,000 .85 8.5
1000 .60 6.0
-2000 .53 5.3
-5000 .50 5.0
c. EU(d1) = 6.725 and EU(d2) = 6.15, so choose d1.
POINTS: 1
TOPICS: Expected utility approach
93.
A decision maker who is considered to be a risk taker is faced with this set of probabilities and payoffs
State of Nature
Decision s1 s2 s3
d1 5 10 20
d2 -25 0 50
d3 -50 -10 80
Probability .30 .35 .35
For the lottery p(80) + (1 - p)(-50), this decision maker has assessed the following indifference probabilities
Payoff Probability
50 .60
20 .35
10 .25
5 .22
0 .20

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-10 .18
-25 .10
Rank the decision alternatives on the basis of expected value and on the basis of expected utility.
ANSWER:
EV(d1) = 12 EV(d2) = 10 EV(d3) = 9.5
EU(d1) = 2.76 EU(d3) = 3.1 EU(d3) = 4.13
POINTS: 1
94. Three decision makers have assessed utilities for the problem whose payoff table appears below.
State of Nature
Decision s1 s2 s3
d1 500 100 -400
d2 200 150 100
d3 -100 200 300
Probability .2 .6 .2
Indifference Probability for Person

Payoff A B C
300 .95 .68 .45
200 .94 .64 .32
150 .91 .62 .28
100 .89 .60 .22
-100 .75 .45 .10
a. Plot the utility function for each decision maker.

b. Characterize each decision maker's attitude toward risk.
c. Which decision will each person prefer?
ANSWER
: a.

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b. Person A is a risk avoider, Person B is fairly risk neutral, and Person C is a

risk avoider.
c. For person A, EU(d1) = .734 EU(d2) EU(d3)
= .912 = .904
For person B, EU(d1) = .56 EU(d2) EU(d3)
= .62 = .61
For person C, EU(d1) = .332 EU(d2) EU(d3)
= .276 = .302
Decision 1 would be chosen by person C. Decision 2 would be chosen by
persons A and B.
POINTS: 1
TOPICS: Risk avoiders versus risk takers
95.
A decision maker has the following utility function
Payoff Indifference Probability

200 1.00
150 .95
50 .75
0 .60
-50 0
What is the risk premium for the payoff of 50?

ANSWER:
EV = .75(200) + .25(-50) = 137.50
Risk premium is 137.50 - 50 = 87.50

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POINTS: 1
payoffs
96.
Determine decision strategies based on expected value and on expected utility for this decision tree. Use the utility
function
Payoff Indifference Probability

500 1.00
350 .89
300 .84
180 .60
100 .43
40 .20
20 .13
0 0
ANSWER
: Let U(500) = 1 and U(0) = 0. Then
After branch Expected value Expected utility

A 120 .336
J 316 .680
K 150 .522
B 127.2 .381

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C 100 .430
Based on expected value, the decision strategy is to select B. If G happens, select J. Based on
expected utility, it is best to choose C.
POINTS: 1
97.
Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy. The fire statistics indicate that in
a given year the probability of property damage in a fire is as follows:
Fire Damage $100,000 $75,000 $50,000 $25,000 $10,000 $0

Probability .006 .002 .004 .003 .005 .980
a. If Burger Prince was risk neutral, how much would they be willing to pay for fire
insurance?
b. If Burger Prince has the utility values given below, approximately how much would
they be willing to pay for fire insurance?
Loss $100,000 $75,000 $50,000 $25,000 $10,000 $5,000 $0

Utility 0 30 60 85 95 99 100
ANSWER
: a. $1,075
b. $5,000
POINTS: 1
TOPICS: Decision making using utility
98.
Super Cola is considering the introduction of a new 8 oz. root beer. The probability that the root beer will be a success is
believed to equal .6. The payoff table is as follows:
Success (s1) Failure (s2)

Produce $250,000 -$300,000
Do Not Produce -$50,000 -$20,000
Company management has determined the following utility values:
Amount $250,000 -$20,000 -$50,000 -$300,000

Utility 100 60 55 0
a. Is the company a risk taker, risk averse, or risk neutral?

b. What is Super Cola's optimal decision?
ANSWER
: a. Risk averse
b. Produce root beer as long as p > 60/105 = .571
POINTS: 1

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99.
Chez Paul is contemplating either opening another restaurant or expanding its existing location. The payoff table for these
two decisions is:
State of Nature
Decision s1 s2 s3
New Restaurant -$80,000 $20,000 $160,000
Expand -$40,000 $20,000 $100,000
Paul has calculated the indifference probability for the lottery having a payoff of $160,000 with probability p and -
$80,000 with probability (1-p) as follows:
Amount Indifference Probability (p)

-$40,000 .4
$20,000 .7
$100,000 .9
a. Is Paul a risk avoider, a risk taker, or risk neutral?

b. Suppose Paul has defined the utility of -$80,000 to be 0 and the utility of $160,000 to
be 80. What would be the utility values for -$40,000, $20,000, and $100,000 based on
the indifference probabilities?
c. Suppose P(s1) = .4, P(s2) = .3, and P(s3) = .3. Which decision should Paul make?
Compare with the decision using the expected value approach.
ANSWER
: a. A risk avoider
b. Amount Utility
-$40,000 32
$20,000 56
$100,000 72
c. Decision is d2; EV criterion decision would be d1
POINTS: 1
100.
The Dollar Department Store chain has the opportunity of acquiring either 3, 5, or 10 leases from the bankrupt Granite
Variety Store chain. Dollar estimates the profit potential of the leases depends on the state of the economy over the next
five years. There are four possible states of the economy as modeled by Dollar Department Stores and its president
estimates P(s1) = .4, P(s2) = .3, P(s3) = .1, and P(s4) = .2. The utility has also been estimated. Given the payoffs (in
$1,000,000's) and utility values below, which decision should Dollar make?
Payoff Table State Of The Economy

Over The Next 5 Years
Decision s1 s2 s3 s4
d1 -- buy 10 leases 10 5 0 -20
d2 -- buy 5 leases 5 0 -1 -10
d3 -- buy 3 leases 2 1 0 -1

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d4 -- do not buy 0 0 0 0
Utility Table
Payoff (in +10 +5 +2 0 -1 -10 -20

$1,000,000's)
Utility +10 +5 +2 0 -1 -20 -50
ANSWER:
Buy 3 leases
POINTS: 1
TOPICS: Decision making using
utility
101.
Consider the following problem with four states of nature, three decision alternatives, and the following payoff table (in
$'s):
The indifference probabilities for three individuals are:
Payoff Person 1 Person 2 Person 3

$ 2600 1.00 1.00 1.00
$ 400 .40 .45 .55
$ 200 .35 .40 .50
$0 .30 .35 .45
-$ 200 .25 .30 .40
-$1400 0 0 0
a. Classify each person as a risk avoider, risk taker, or risk neutral.

b. For the payoff of $400, what is the premium the risk avoider will pay to avoid risk? What is the premium the risk
taker will pay to have the opportunity of the high payoff?
c. Suppose each state is equally likely. What are the optimal decisions for each of these three people?
s1 s2 s3 s4
d1 200 2600 -1400 200
d2 0 200 - 200 200
d3 -200 400 0 200
ANSWER:
a. Person 1 -- risk taker; Person 2 -- risk neutral; Person 3 -- risk
avoider
b. Risk avoider would pay $400; Risk taker would pay $200
c. Person 1 -- d1; Person 2 -- d1; Person 3 -- d1
POINTS: 1
TOPICS: Risk avoiders and risk takers
102.
Metropolitan Cablevision has the choice of using one of three DVR systems. Profits are believed to be a function of
customer acceptance. The payoff to Metropolitan for the three systems is:
System
Acceptance Level I II III

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High $150,000 $200,000 $200,000
Medium $ 80,000 $ 20,000 $ 80,000
Low $ 20,000 -$ 50,000 -$100,000
The probabilities of customer acceptance for each system are:
System
Acceptance Level I II III
High .4 .3 .3
Medium .3 .4 .5
Low .3 .3 .2
The first vice president believes that the indifference probabilities for Metropolitan should be:
Amount Probability
$150,000 .90
$ 80,000 .70
$ 20,000 .50
-$ 50,000 .25
The second vice president believes Metropolitan should assign the following utility values:
Amount Utility
$200,000 125
$150,000 95
$ 80,000 55
$ 20,000 30
-$ 50,000 10
-$100,000 0
a. Which vice president is a risk taker? Which one is risk averse?

b. Which system will each vice president recommend?
c. What system would a risk neutral vice president recommend?
ANSWER:
a. Risk Taker -- Second Vice President
Risk Avoider -- First Vice President
b. First Vice President -- System I
Second Vice President -- System III
c. Risk Neutral Vice President -- System
I
POINTS: 1
TOPICS: Risk avoiders and risk takers
Essay
103. When and why should a utility approach be followed?

POINTS: 1
TOPICS: Expected value versus
utility

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104. Give two examples of situations where you have decided on a course of action that did not have the highest expected
monetary value.
POINTS: 1
TOPICS: Expected value versus
utility
105. Explain how utility could be used in a decision where performance is not measured by monetary value.
POINTS: 1
TOPICS: Expected value versus expected
utility
106. Explain the relationship between expected utility, probability, payoff, and utility.
POINTS: 1
TOPICS: Expected value versus expected
utility
107. Draw the utility curves for three types of decision makers, label carefully, and explain the concepts of increasing and
decreasing marginal returns for money.
POINTS: 1
takers
108. Explain why the decision maker might feel uncomfortable with the expected value approach, and decide to use a
non-probabilistic approach even when probabilities are available.
POINTS: 1
probabilities
109. Why perform sensitivity analysis? Of what use is sensitivity analysis where good probability estimates are difficult to
obtain?
POINTS: 1
110. How can a good decision maker "improve" luck?

POINTS: 1
TOPICS: Introduction
111. Use a diagram to compare EVwPI, EVwoPI, EVPI, EVwSI, EVwoSI, and EVSI.
POINTS: 1

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112. Show how you would design a spreadsheet to calculate revised probabilities for two states of nature and two
indicators.
POINTS: 1
TOPICS: Decision analysis and
spreadsheets

Chapter 13 Decision Analysis Test Bank

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Chapter 13 Decision Analysis Test Bank

数据模型与决策 (Wuhan University)

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Chapter 13 - Decision Analysis

1. Sample information with an efficiency rating of 100% is perfect information.

3. Decision alternatives are structured so that several could occur simultaneously.

4. Square nodes in a decision tree indicate that a decision must be made.

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Chapter 13 - Decision Analysis

7. The expected value of an alternative can never be negative.

9. EVPI is always greater than or equal to EVSI.

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Chapter 13 - Decision Analysis

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Chapter 13 - Decision Analysis

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Chapter 13 - Decision Analysis

25. A risk avoider will have a concave utility function.

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Chapter 13 - Decision Analysis

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Chapter 13 - Decision Analysis

35. States of nature

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Chapter 13 - Decision Analysis

37. Making a good decision

38. A decision tree

40. Sensitivity analysis considers

Cengage Learning Testing, Powered by Cognero Page 8

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Chapter 13 - Decision Analysis

41. To find the EVSI,

43. The efficiency of sample information is

44. Decision tree probabilities refer to

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Chapter 13 - Decision Analysis

49. In an influence diagram, decision nodes are represented by

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Chapter 13 - Decision Analysis

51. Decision tree probabilities refer to the probability of

53. A decision tree provides

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Chapter 13 - Decision Analysis

54. The approach to determining the optimal decision strategy involves

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Chapter 13 - Decision Analysis

58. The expected utility approach

59. Utility reflects the decision maker's attitude toward

60. Values of utility

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Chapter 13 - Decision Analysis

65. A decision maker whose utility function graphs as a straight line is

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Chapter 13 - Decision Analysis

Subjective Short Answer

Home Sales Number of Months

b. (1) Conservative Approach (Maximin): Plan I

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Chapter 13 - Decision Analysis

c. Use the relative frequency method for determining the probabilities.

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