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Quantitative Analysis for Management, 13e (Render et al.)

Chapter 3 Decision Analysis

31) TRUE OR FALSE. A second table (an opportunity loss table) must be computed when
applying the maximin decision criterion.

32) TRUE OR FALSE. The following figure illustrates a utility curve for someone who is a risk
seeker.

33) An analytic and systematic approach to the study of decision making is referred to as
A) decision making under risk.
B) decision making under uncertainty.
C) decision theory.
D) decision analysis.

34) What makes the difference between good decisions and bad decisions?
A) A good decision is based on logic.
B) A good decision considers all available data.
C) A good decision considers all alternatives.
D) A good decision applies quantitative approaches.

35) Expected monetary value (EMV) is

A) the average or expected monetary outcome of a decision if it can be repeated a large number
of times.
B) the average or expected value of the decision, if you know what would happen ahead of time.
C) the average or expected value of information if it were completely accurate.
D) the amount you would lose by not picking the best alternative.

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36) Which of the following is not considered a criterion for decision making under uncertainty?
A) optimistic
B) pessimistic
C) equally likely
D) random selection

37) A pessimistic decision-making criterion is

A) maximax.
B) equally likely.
C) maximin.
D) decision making under certainty.

38) Which of the following is true about the expected value of perfect information?
A) It is the amount you would pay for any sample study.
B) It is calculated as EMV minus EOL.
C) It is calculated as expected value with perfect information minus maximum EMV.
D) It is the amount charged for marketing research.

39) Which of the following is not a characteristic of a good decision?

A) based on logic
B) considers all available data
C) employs appropriate quantitative techniques
D) always results in a favorable outcome

40) The following is a payoff table giving costs for various situations.

State 1 State 2 State 3

Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

What decision would an optimist make?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Alternative 4

41) The following is a payoff table giving costs for various situations.

State 1 State 2 State 3

Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

What decision would a pessimist make?

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A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Alternative 4

42) The following is a payoff table giving costs for various situations.

State 1 State 2 State 3

Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

What decision should be made based on the Laplace criterion?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Alternative 4

43) The following is a payoff table giving costs for various situations.

State 1 State 2 State 3

Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

What decision should be made based on the minimax regret criterion?

A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Alternative 4

44) The following is a payoff table giving costs for various situations.

State 1 State 2 State 3

Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

What are the regret values for Alternative 3 as read from State 1 to State 3?
A) 17, 16, 25
B) 29, 0, 7
C) 7, 32, 36
D) 23, 65, 91

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45) The following is a payoff table giving profits for various situations.

State 1 State 2 State 3

Probability 0.4 0.35 0.25
Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

If a person were to use the expected monetary value criterion, what decision would be made?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Alternative 4

46) The following is a payoff table giving profits for various situations.

State 1 State 2 State 3

Probability 0.4 0.35 0.25
Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

If a person selected Alternative 1, what would the expected profit be?

A) 51.7
B) 54.7
C) 55.0
D) 57.3

47) The following is a payoff table giving profits for various situations.

State 1 State 2 State 3

Probability 0.4 0.35 0.25
Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

What is the expected value of perfect information?

A) 7.6
B) 8.4
C) 8.8
D) 9.2
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48) Consider the following payoff table.

State 1 State 2 State 3

Probability 0.4 0.35 0.25
Alternative 1 45 37 83
Alternative 2 16 59 72
Alternative 3 23 65 91
Alternative 4 44 33 55

Based upon these probabilities, a person would select Alternative 3. Suppose there is concern
about the accuracy of these probabilities. A few of the analysts feel that the likelihood of State 1
is higher and that the likelihood of State 2 is much lower. If the likelihood of State 2 is reduced
at the expense of State 1, how much lower can State 2's likelihood fall before Alternative 3 is no
longer optimal?
A) 0.05
B) 0.06
C) 0.07
D) 0.08

49) Consider the following payoff table.

States of Nature
Alternatives A B
Alternative 1 100 150
Alternative 2 200 100
Probability 0.4 0.6

How much should be paid for a perfect forecast of the state of nature?
A) 170
B) 30
C) 10
D) 100

50) The following is a payoff table giving profits for various situations.

States of Nature
Alternatives A B C
Alternative 1 100 120 180
Alternative 2 200 100 50
Alternative 3 120 140 120
Do Nothing 0 0 0

The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect
forecast of the future were available, what is the expected value with this perfect information?
A) 130
B) 160
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C) 166
D) 36

51) The following is a payoff table giving profits for various situations.

States of Nature
Alternatives A B C
Alternative 1 100 120 180
Alternative 2 200 100 50
Alternative 3 120 140 120
Do Nothing 0 0 0

The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect
forecast of the future were available, what is the expected value of perfect information (EVPI)?
A) 166
B) 0
C) 36
D) 40

52) Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has
prepared a payoff table to help analyze the situation.

States of Nature
Good Fair Poor
Alternatives Market Market Market
Open 1 380,000 70,000 - 400,000
Open 2 200,000 80,000 - 200,000
Do Nothing 0 0 0

As Nick does not know how his product will be received, he assumes that all three states of
nature are equally likely to occur. If he uses the equally likely criterion, what decision would he
make?
A) Open 1
B) Open 2
C) Good market
D) Fair market

53) Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has
prepared a payoff table to help analyze the situation.

States of Nature
Good Fair Poor
Alternatives Market Market Market
Open 1 380,000 70,000 - 400,000
Open 2 200,000 80,000 - 200,000
Do Nothing 0 0 0

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Nick believes there is a 40 percent chance that the market will be good, a 30 percent chance that
it will be fair, and a 30 percent chance that it will be poor. A market research firm will analyze
market conditions and will provide a perfect forecast (they provide a money back guarantee).
What is the most that should be paid for this forecast?
A) $ 44,000
B) $ 53,000
C) $123,000
D) $176,000

54) Which of the following is the fourth step of the "Six Steps in Decision Making"?
A) Select one of the mathematical decision theory models.
B) List the possible alternatives.
C) Apply the model and make your decision.
D) List the payoff or profit of each combination of alternatives and outcomes.

55) Which of the following is not one of the steps considered in the "Six Steps in Decision
Making"?
A) Clearly define the problem at hand.
B) List the possible alternatives.
C) Apply the model and make your decision.
D) Evaluate the success of the decision.

56) Optimistic decision makers tend to

A) magnify favorable outcomes.
B) ignore bad outcomes.
C) discount favorable outcomes.
D) A and B

57) Pessimistic decision makers tend to

A) magnify favorable outcomes.
B) ignore bad outcomes.
C) discount favorable outcomes.
D) A and B

58) In decision theory, we call the payoffs resulting from each possible combination of
alternatives and outcomes
A) marginal values.
B) conditional values.
C) conditional probabilities.
D) Bayesian values.

59) Another name for a decision table is a

A) payment table.
B) payout table.
C) payoff table.
D) pay-up table.
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60) How are decision tables organized?
A) alternatives down the left, states of nature on top, payoffs inside
B) states of nature down the left, alternatives on top, payoffs inside
C) alternatives down the left, payoffs on top, states of nature inside
D) payoffs down the left, alternatives on top, states of nature inside

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