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Exam 12: Decision Analysis

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Question 61

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The Hurwicz criterion multiplies the best payoff by the coefficient of optimism.

A) True
B) False

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Question 62

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The maximin criterion maximizes the minimum regret.

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B) False

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Question 63

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The maximax criterion results in the

A manufacturer must decide whether to build a small or a large plant at a new location. Demand at the location can be either low or high, with probabilities estimated to be 0.4 and 0.6, respectively. If a small plant is built, and demand is high, the production manager may choose to maintain the current size or to expand. The net present value of profits is $223,000 if the firm chooses not to expand. However, if the firm chooses to expand, there is a 50% chance that the net present value of the returns will be 330,000 and a 50% chance the estimated net present value of profits will be $210,000. If a small facility is built and demand is low, there is no reason to expand and the net present value of the profits is $200,000. However, if a large facility is built and the demand turns out to be low, the choice is to do nothing with a net present value of $40,000 or to stimulate demand through local advertising. The response to advertising can be either modest with a probability of .3 or favorable with a probability of .7. If the response to advertising is modest, the net present value of the profits is $20,000. However, if the response to advertising is favorable, then the net present value of the profits is $220,000. Finally, if the large plant is built and the demand happens to be high, the net present value of the profits $800,000. -Draw a decision tree and determine the payoff for each decision and event node. Which alternative should the manufacturer choose?

The expected value of sample information

A ________ probability is the altered marginal probability of an event based on additional information.

A business owner is trying to decide whether to buy, rent, or lease office space and has constructed the following payoff table based on whether business is brisk or slow. $\begin{array} { l | c r } \text { Alternative } & \text { Brisk } & \text { Slow } \\\hline \text { Buy } & 90 & - 10 \\\text { Rent } & 70 & 40 \\\text { Lease } & 60 & 55\end{array}$ The equal likelihood criterion strategy is

The Hurwicz criterion is a compromise between the minimax and minimin criteria.

The Hurwicz criterion

________ is the difference between the payoff from the best decision and all other decision payoffs.

A group of friends are planning a recreational outing and have constructed the following payoff table to help them decide which activity to engage in. Assume that the payoffs represent their level of enjoyment for each activity under the various weather conditions. $\begin{array}{lcccc}&&&\text { Weather }\\&&Cold &Warm& Rainy\\&&\mathrm{S} & \mathrm{S}_{2} & \mathrm{~S}_{3}\\\text { Bike: } & \text { Al } & 10 & 8 & 6 \\\text { Hike: } & \text { A2 } & 14 & 15 & 2 \\\text { Fish: } & \text { A3 } & 7 & 8 & 9\end{array}$ -If the group is conservative, what decision will they make?

A manager has developed a payoff table that indicates the profits associated with a set of alternatives under two possible states of nature. $\begin{array} { c c c } \text { Alt } & \mathbf { S } _ { \mathbf { 1 } } & \mathbf { S } _ { \mathbf { 2 } } \\\mathbf { 1 } & 10 & 2 \\\mathbf { 2 } & - 2 & 8 \\\mathbf { 3 } & 8 & 5\end{array}$ -If the manager uses maximin as the decision criterion, which of the alternatives should she choose?

The maximin approach to decision making refers to

If the decision maker receives additional information such that the marginal probabilities of certain events should be modified, these revised probabilites are called ________.

The quality control manager for ENTA Inc. must decide whether to accept (A1), further analyze (A2), or reject (A3) a lot of incoming material. Assume the following payoff table is available. Historical data indicates that there is 30% chance that the lot is poor quality (S1), 50 % chance that the lot is fair quality (S2), and 20% chance that the lot is good quality (S3). $\begin{array} { l r r r } & \mathbf { S } _ { \mathbf { 1 } } & \mathbf { S } _ { \mathbf { 2 } } & \mathbf { S } _ { \mathbf { 3 } } \\\mathbf { A } _ { \mathbf { 1 } } & 20 & 30 & 90 \\\mathbf { A } _ { \mathbf { 2 } } & 60 & 70 & 10 \\\mathbf { A } _ { \mathbf { 3 } } & 80 & 50 & 40\end{array}$ -What action would you choose according to expected value criterion?

The minimax regret criterion maximizes the minimum regret.

Consider the following decision tree. What is the expected value at node 4?

The maximin criterion results in the

Events are mutually exclusive if one, and only one, can occur at a time.

A payoff table is a means of organizing a decision situation, including the payoffs from different decisions given the various states of nature.