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Exam 12: Decision Analysis

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Question 41

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The minimax criterion minimizes the maximum payoff.

A) True
B) False

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Question 42

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

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B) False

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Question 43

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Napoleon is contemplating four institutions of higher learning as options for a Masters in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars. $\begin{array} { | l | c | c | c | } \hline \text { School } & \text { Scenario 1 } & \text { Scenario 2 } & \text { Scenario 3 } \\\hline \text { Vanderbilt } & 95 & 20 & - 10 \\\hline \text { Texas Tech } & 55 & 60 & 60 \\\hline \text { Seattle } & 90 & 10 & 80 \\\hline \text { Northeastern State } & 65 & 50 & 60 \\\hline\end{array}$ -Under which criterion is Northeastern State University the optimal decision?

A ________ probability is the probability that an event will occur given that another event has already occurred.

The ________ is computed by multiplying each decision outcome under each state of nature by the probability of its occurrence.

Compute the expected value of perfect information assuming that the probability of S2 is equal to 0.4.

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 maximax strategy is

In ________ additional information is used to alter the marginal probability of the occurrence of an event.

Regret is the difference between the payoff from the

A state of nature is an actual event that may occur in the future.

Consider the following decision tree. What is the value associated with node 3?

The equal likelihood criterion assigns a probability of 0.5 to each state of nature.

The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues (in thousands) will vary with how well taxpayers comply with the new tax code. $\begin{array} { c c c c } \hline \text { \# of Workers } & \begin{array} { c } \text { Low } \\\text { Compliance }\end{array} & \begin{array} { c } \text { Medium } \\\text { Compliance }\end{array} & \begin{array} { c } \text { High } \\\text { Compliance }\end{array} \\\hline 1 & 50 & 50 & 50 \\2 & 100 & 60 & 20 \\3 & 150 & 70 & - 10 \\\hline\end{array}$ -If he thinks the chances of low, medium, and high compliance are 20%, 30%, and 50%, respectively, what are the expected net revenues for the number of workers he will decide to hire?

The maximin approach involves choosing the alternative with the highest payoff.

The basic decision environment categories are

The appropriate criterion is dependent on

When the ________ criterion is used, the maximum of the maximum payoffs is selected.

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 minimax regret as the decision criterion, which of the alternatives would she choose?

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 maximin strategy is

The ________ is a measure of the decision maker's optimism.