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Exam 21: Extension 5: Decision Theory

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Question 21

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A manager is quite concerned about the recent deterioration of a section of the roof on a building that houses her firm's computer operations.According to her assistant there are three options which merit consideration: A, B, and C.Moreover, there are three possible future conditions that must be included in the analysis: I, which has a probability of occurrence of .5; II, which has a probability of .3; and III, which has a probability of .2. If condition I materializes, A will cost $12,000, B will cost $20,000, and C will cost $16,000.If condition II materializes, the costs will be $15,000 for A, $18,000 for B, and $14,000 for C.If condition III materializes, the costs will be $10,000 for A, $15,000 for B, and $19,000 for C. (A) Draw a decision tree for this problem. (B) Using expected monetary value, which alternative should be chosen?

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Question 22

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-If you feel that P(#1) = .4, P(#2) = .3, P(#3) = .2, and P(#4) = .1, what is your expected value of perfect information?

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Question 23

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Option A has a payoff of $10,000 in environment 1 and $20,000 in environment 2.Option B has a payoff of $5,000 in environment 1 and $27,500 in environment 2.Once the probability of environment 1 exceeds ______, option A becomes the better choice.

If she uses the maximax criterion, which advertising strategy will she use?

Bounded rationality refers to the limits imposed on decision-making because of costs, human abilities, time, technology, and/or availability of information.

What is the expected value for the optimum decision alternative?

If she feels the chances of low, medium, and high compliance are 20%, 30%, and 50% respectively, what are the expected net revenues for the number of assistants she will decide to hire?

Option A has a payoff of $10,000 in environment 1 and $20,000 in environment 2.Option B has a payoff of $12,500 in environment 1 and $17,500 in environment 2.Once the probability of environment 2 exceeds ______, option A becomes the better choice.

Determining the worst payoff for each alternative and choosing the alternative with the "best worst" is the approach called:

If she uses the Laplace criterion, which advertising strategy will she use?

A decision tree is:

-If you are uncertain which state of nature will occur, and use the minimax regret criterion, which alternative will you select?

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

Which of the following would make decision trees an especially attractive decision making tool?

The maximax approach is a pessimistic strategy.

The minimax regret strategy would be:

For what range of probability that demand will be high, will she decide to lease the large facility?

If he uses the maximax criterion, which alternative will he decide to select?

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 Laplace criterion treats states of nature as being equally likely.