Chap 005 S

Chapter 05S - Supplement: Decision Theory
Chapter 05S Supplement: Decision Theory
True / False Questions 1. Decision trees, with their predetermined analysis of a situation, are really not useful in makin health care decisions since e!ery person is uni"ue. FALSE
AACSB: RT Difficulty: Easy TLO: 1 Taxonomy: Synthesis
#. $ounded rationality refers to the limits imposed on decision-makin %ecause of costs, human a%ilities, time, technolo y, and&or a!aila%ility of information. TRUE
Difficulty: Easy TLO: 1 Taxonomy: Knowled e
'. (n reachin a decision, the alternati!e with the lowest cost should %e ranked )1. FALSE
Difficulty: !edium TLO: 1 Taxonomy: Knowled e
5-1
*. The e+pected monetary !alue approach is most appropriate when the decision-maker is risk-neutral. TRUE
Difficulty: !edium TLO: " Taxonomy: Knowled e
5. The !alue of perfect information is in!ersely related to losses predicted. FALSE
Difficulty: #a$d TLO: % Taxonomy: Knowled e
,. -+pected monetary !alue i!es the lon -run a!era e payoff if a lar e num%er of identical decisions could %e made. TRUE
.. /mon decision en!ironments, risk implies that certain parameters ha!e pro%a%ilistic outcomes. TRUE
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0. /mon decision en!ironments, uncertainty implies that states of nature ha!e wide ran in pro%a%ilities associated with them. FALSE
1. (n decision theory, states of nature refer to possi%le future conditions. TRUE
Difficulty: Easy TLO: 1 Taxonomy: Knowled e
10. The ma+imin approach in!ol!es choosin the alternati!e with the hi hest payoff. FALSE
Difficulty: #a$d TLO: & Taxonomy: Knowled e
11. The ma+imin approach in!ol!es choosin the alternati!e that has the 2%est worst2 payoff. TRUE
Difficulty: !edium TLO: & Taxonomy: Knowled e
1#. The 3aplace criterion treats states of nature as %ein e"ually likely. TRUE
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1'. The ma+ima+ approach is a pessimistic strate y. FALSE
1*. / weakness of the ma+imin approach is that it loses some information. TRUE
15. The e+pected !alue approach applies to decision-makin under uncertainty. FALSE
1,. The e+pected !alue approach is used for decision-makin under risk. TRUE
Difficulty: Easy TLO: " Taxonomy: Knowled e
1.. The -45( indicates an upper limit on the amount a decision-maker should %e willin to spend to o%tain additional information. TRUE
AACSB: RT Difficulty: #a$d TLO: " Taxonomy: Synthesis
5-*
10. 6raphical sensiti!ity analysis is limited to cases with no more than two alternati!es. FALSE
Difficulty: #a$d TLO: ' Taxonomy: Knowled e
11. 6raphical sensiti!ity analysis is used for decision-makin under risk. TRUE
Difficulty: !edium TLO: ' Taxonomy: Knowled e
#0. /n ad!anta e of decision trees compared to payoff ta%les is that they permit us to analy7e situations in!ol!in se"uential decisions. TRUE
Difficulty: !edium TLO: ( Taxonomy: Knowled e
ultiple Choice Questions #1. The term su%-optimi7ation is %est descri%ed as the: A! result of indi!idual departments makin the %est decisions for their own areas $. limitations on decision-makin caused %y costs and time C. result of failure to adhere to the steps in the decision process D. result of i norin symptoms of the pro%lem -. none of the a%o!e
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##. 8hich phrase %est descri%es the term %ounded rationality9 /. thinkin a pro%lem throu h clearly %efore actin $. takin care not to e+haust limited resources C. the result of departmentali7ed decision makin D! limits imposed on decision makin %y costs, time, and technolo y -. the use of e+tremely structured steps in the decision makin process
Difficulty: #a$d TLO: 1 Taxonomy: Knowled e
#'. Testin how a pro%lem solution reacts to chan es in one or more of the model parameters is called: /. simulation "! sensiti!ity analysis C. priority reco nition D. analysis of !ariance -. decision analysis
#*. Sensiti!ity analysis is re"uired %ecause ::::::::. A! payoffs and pro%a%ilities are estimates $. most decision will affect employees C. e+pected payoffs are sensiti!e to the time !alue of money D. it;s the second step in the decision model -. with the passa e of time, small decisions et %i er
AACSB: RT Difficulty: !edium TLO: ' Taxonomy: Knowled e
5-,
#5. / ta%ular presentation that shows the outcome for each decision alternati!e under the !arious possi%le states of nature is called a&an: A! payoff ta%le $. feasi%le re ion C. 3a5lace ta%le D. decision tree -. pay%ack period matri+
#,. 8hich of the followin characteri7es decision-makin under uncertainty9 /. Decision-makers must rely on pro%a%ilities in assessin outcomes. "! The likelihood of possi%le future e!ents is unknown. C. <ele!ant parameters ha!e known !alues. D. Certain parameters ha!e pro%a%ilistic outcomes. -. none of the a%o!e
#.. 8hich of the followin is not an approach for decision-makin under uncertainty9 A! decision trees $. ma+imin C. ma+ima+ D. minima+ re ret -. 3aplace
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#0. Determinin the worst payoff for each alternati!e and choosin the alternati!e with the 2%est worst2 is the approach called: /. minimin "! ma+imin C. ma+ima+ D. minima+ re ret -. 3aplace
#1. Determinin the a!era e payoff for each alternati!e and choosin the alternati!e with the hi hest a!era e is the approach called: /. minimin $. ma+imin C. ma+ima+ D. minima+ re ret E! 3aplace
'0. The ma+imin approach to decision-makin refers to: /. minimi7in the ma+imum return "! ma+imi7in the minimum return C. ma+imi7in the minimum e+pected !alue D. choosin the alternati!e with the hi hest payoff -. choosin the alternati!e with the minimum payoff
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'1. 8hich one of these is not used in decision-makin under risk9 /. -45( $. -=4 C. decision trees D! minima+ re ret -. /ll are used for risk situations.
Difficulty: #a$d TLO: " Taxonomy: Knowled e
'#. The term opportunity loss or re ret is most closely associated with: A! minima+ re ret $. ma+ima+ C. ma+imin D. e+pected monetary !alue -. 3aplace
Difficulty: #a$d TLO: & Taxonomy: Knowled e
''. The e+pected monetary !alue criterion >-=4? is the decision-makin approach used with the decision en!ironment of: /. certainty "! risk C. uncertainty D. all of the a%o!e -. none of the a%o!e
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'*. / decision tree is: /. an al e%raic representation of alternati!es $. a %eha!ioral representation of alternati!es C. a matri+ representation of alternati!es D! a schematic representation of alternati!es -. limited to a ma+imum of 1# %ranches
Difficulty: !edium TLO: ( Taxonomy: Knowled e
'5. The difference %etween e+pected payoff under certainty and e+pected payoff under risk is the e+pected: /. monetary !alue "! !alue of perfect information C. net present !alue D. rate of return -. profit
AACSB: AS Difficulty: #a$d TLO: % Taxonomy: A))lication
',. (f the minimum e+pected re ret is computed, it indicates to a decision-maker the e+pected: A! !alue of perfect information $. payoff under certainty C. monetary !alue D. payoff under risk -. none of the a%o!e
AACSB: AS Difficulty: !edium TLO: % Taxonomy: A))lication
5-10
'.. The term sensiti!ity analysis is most closely associated with: /. ma+ima+ $. ma+imin C! decision-makin under risk D. minima+ re ret -. 3aplace criterion
Essay Questions
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'0. / mana er has de!eloped the followin payoff ta%le that indicates the profits associated with a set of alternati!es under two possi%le states of nature.
/nswer the followin "uestions: >/? (f the mana er uses ma+imin as the decision criterion, which of the alternati!es would %e indicated9 >$? (f the mana er uses minima+ re ret as the criterion, which alternati!e would %e indicated9 >C? Determine the e+pected !alue of perfect information if 5>S#? @ .*0. >D? Determine the ran e of 5>S#? for which each alternati!e would %e optimal.
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>/? =a+imin: /lt. ' >$? <e ret matri+ is:
Aminimum re ret
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Therefore, /lternati!e 1 or ' would %e selected under risk, within -45( of #.* >=in -45( @ =a+ -=4?.
AACSB: AS Difficulty: !edium TLO: &* "* ' Taxonomy: A))lication
'1. / mana er;s staff has compiled the information %elow which pertains to four capacity alternati!es under four states of nature. 4alues in the matri+ are present !alue in thousands of dollars.
>/? /ssumin a ma+ima+ strate y, which alternati!e would %e chosen9 >$? (f ma+imin were used, which alternati!e would %e chosen9 >C? (f states of nature are e"ually likely and an e+pected !alue criterion of ma+imi7ation is used, which alternati!e would %e chosen9 >/? =a+ima+ is / >B50 is the lar est !alue for any alternati!e?. >$? =a+imin is either $ or C >$oth ha!e the lar est minimum !alues of B'0?. >C? /: B'5C $: B''..5C C: B'1.#5C D: B#..50. Dence, choose /.
AACSB: AS Difficulty: !edium TLO: &* " Taxonomy: A))lication
5-15
*0. / mana er has learned that annual profits from four alternati!es %ein considered for sol!in a capacity pro%lem are proEected to %e B15,000 for /, B'0,000 for $, B*5,000 for C, and B,0,000 for D if state of nature 1 occursC and B,0,000 for /, B00,000 for $, B10,000 for C, and B'5,000 for D if state of nature # occurs. >/? /ssumin ma+ima+ is used, what alternati!e would %e chosen9 >$? /ssumin ma+imin is used, what alternati!e would %e chosen9 >C? (f 5>State of Fature 1? is .*0, what alternati!e has the hi hest e+pected monetary !alue9 >D? Determine the ran e of 5>S#? for which each alternati!e would %e optimal.
>/? =a+ima+ is C >B10? >$? =a+imin is C >B*5? >C? =a+ -=4 is C >B.#? >D? <efer to the dia ram, a%o!e.
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AACSB: AS Difficulty: !edium TLO: &* "* ' Taxonomy: A))lication
*1. / mana er is "uite concerned a%out the recent deterioration of a section of the roof on a %uildin that houses her firm;s computer operations. /ccordin to her assistant there are three options which merit consideration: /, $, and C. =oreo!er, there are three possi%le future conditions that must %e included in the analysis: (, which has a pro%a%ility of occurrence of .5C ((, which has a pro%a%ility of .'C and (((, which has a pro%a%ility of .#. (f condition ( materiali7es, / will cost B1#,000, $ will cost B#0,000, and C will cost B1,,000. (f condition (( materiali7es, the costs will %e B15,000 for /, B10,000 for $, and B1*,000 for C. (f condition ((( materiali7es, the costs will %e B10,000 for /, B15,000 for $, and B11,000 for C. >/? Draw a decision tree for this pro%lem. >$? Gsin e+pected monetary !alue, which alternati!e should %e chosen9
/lternati!e / >e+pected monetary !alue @ B1#.5H? should %e chosen.
AACSB: AS Difficulty: !edium TLO: "* ( Taxonomy: A))lication
ultiple Choice Questions
5-1.
A54 for profits >B000?
*#. The ma+ima+ strate y would %e: A! %uy $. lease C. rent D. hi h -. low
AACSB: AS Difficulty: !edium TLO: & Taxonomy: A))lication
*'. The ma+imin strate y would %e: /. %uy "! lease C. rent D. hi h -. low
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**. The minima+ re ret strate y would %e: /. %uy "! lease C. rent D. hi h -. low
*5. (f 5>hi h? is .,0, the choice for ma+imum e+pected !alue would %e: /. %uy $. lease C! rent D. hi h -. low
AACSB: AS Difficulty: !edium TLO: " Taxonomy: A))lication
5-11
*,. The ma+ima+ strate y would %e: /. small $. medium C. med.-lar e D. lar e E! e+-lar e
*.. The ma+imin strate y would %e: /. small $. medium C. med.-lar e D! lar e -. e+-lar e
*0. The minima+ re ret strate y would %e: /. small $. medium C. med.-lar e D! lar e -. e+-lar e
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*1. (f yes and no are e"ually likely, which alternati!e has the lar est e+pected monetary !alue9 /. small $. medium C. med.-lar e D. lar e E! e+-lar e
50. The ma+ima+ strate y would %e: /. / $. $ C. C D. D E! -
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51. The ma+imin strate y would %e: /. / $. $ C! C D. D -. -
5#. The minima+ re ret strate y would %e: /. / "! $ C. C D. D -. -
5'. 8ith e"ually likely states of nature, the alternati!e that has the lar est e+pected monetary !alue is: /. / "! $ C. C D. D -. -
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The new owner of a %eauty shop is tryin to decide whether to hire one, two, or three %eauticians. She estimates that profits ne+t year >in thousands of dollars? will !ary with demand for her ser!ices and has estimated demand in three cate ories low, medium and hi h
5*. (f she uses the ma+ima+ criterion, how many %eauticians will she decide to hire9 /. one $. two C! three D. either one or two -. either two or three
55. (f she uses the 3aplace criterion, how many %eauticians will she decide to hire9 /. one "! two C. three D. either one or two -. either two or three
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5,. (f she uses the minima+ re ret criterion, how many %eauticians will she decide to hire9 A! one $. two C. three D. either one or two -. either two or three
5.. (f she feels the chances of low, medium, and hi h demand are 50I, #0I, and '0I respecti!ely, what are the e+pected annual profits for the num%er of %eauticians she will decide to hire9 /. B5*,000 $. B55,000 C. B.0,000 D! B00,000 -. B1'5,000
50. (f she feels the chances of low, medium, and hi h demand are 50I, #0I, and '0I respecti!ely, what is her e+pected !alue of perfect information9 /. B5*,000 "! B55,000 C. B.0,000 D. B00,000 -. B1'5,000
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The operations mana er for a local %us company wants to decide whether he should purchase a small, medium, or lar e new %us for his company. De estimates that the annual profits >in B000? will !ary dependin upon whether passen er demand is low, moderate, or hi h, as follows:
51. (f he uses the ma+imin criterion, which si7e %us will he decide to purchase9 A! small $. medium C. lar e D. either small or medium -. either medium or lar e
,0. (f he uses the 3aplace criterion, which si7e %us will he decide to purchase9 /. small "! medium C. lar e D. either small or medium -. either medium or lar e
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,1. (f he uses the minima+ re ret criterion, which si7e %us will he decide to purchase9 /. small $. medium C. lar e D. either small or medium E! either medium or lar e
,#. (f he feels the chances of low, moderate, and hi h demand are '0I, '0I, and *0I respecti!ely, what is the e+pected annual profit for the %us that he will decide to purchase9 /. B15,000 $. B,1,000 C. B,1,000 D! B.#,000 -. B0.,000
,'. (f he feels the chances of low, moderate, and hi h demand are '0I, '0I, and *0I respecti!ely, what is his e+pected !alue of perfect information9 A! B15,000 $. B,1,000 C. B,1,000 D. B.#,000 -. B0.,000
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The operations mana er for a well-drillin company must recommend whether to %uild a new facility, e+pand his e+istin one, or do nothin . De estimates that lon -run profits >in B000? will !ary with the amount of precipitation >rainfall? as follows:
,*. (f he uses the ma+ima+ criterion, which alternati!e will he decide to select9 /. do nothin $. e+pand C! %uild new D. either do nothin or e+pand -. either e+pand or %uild new
,5. (f he uses the 3aplace criterion, which alternati!e will he decide to select9 /. do nothin $. e+pand C. %uild new D. either do nothin or e+pand E! either e+pand or %uild new
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,,. (f he uses the minima+ re ret criterion, which alternati!e will he decide to select9 /. do nothin $. e+pand C! %uild new D. either do nothin or e+pand -. either e+pand or %uild new
,.. (f he feels the chances of low, normal, and hi h precipitation are '0I, #0I, and 50I respecti!ely, what are e+pected lon -run profits for the alternati!e he will select9 /. B1*0,000 $. B1.0,000 C. B#05,000 D! B'05,000 -. B*.5,000
,0. (f he feels the chances of low, normal, and hi h precipitation are '0I, #0I, and 50I respecti!ely, what is his e+pected !alue of perfect information9 /. B1*0,000 "! B1.0,000 C. B#05,000 D. B'05,000 -. B*.5,000
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The local operations mana er for the (nternal <e!enue Ser!ice must decide whether to hire one, two, or three temporary ta+ e+aminers for the upcomin ta+ season. She estimates that net re!enues >in thousands of dollars? will !ary with how well ta+payers comply with the new ta+ code Eust passed %y Con ress, as follows:
,1. (f she uses the ma+imin criterion, how many new e+aminers will she decide to hire9 A! one $. two C. three D. either one or two -. either two or three
.0. (f she uses the 3aplace criterion, how many new e+aminers will she decide to hire9 /. one $. two C! three D. either one or two -. either two or three
5-#1
.1. (f she uses the minima+ re ret criterion, how many new e+aminers will she decide to hire9 /. one "! two C. three D. either one or two -. either two or three
.#. (f she feels the chances of low, medium, and hi h compliance are #0I, '0I, and 50I respecti!ely, what are the e+pected net re!enues for the num%er of assistants she will decide to hire9 /. B#,,000 $. B*,,000 C. B*0,000 D! B50,000 -. B.,,000
.'. (f she feels the chances of low, medium, and hi h compliance are #0I, '0I, and 50I respecti!ely, what is her e+pected !alue of perfect information9 /. B1,,000 "! B#,,000 C. B*,,000 D. B*0,000 -. B50,000
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The construction mana er for /cme Construction, (nc. must decide whether to %uild sin lefamily homes, apartments, or condominiums. De estimates annual profits >in B000? will !ary with the population trend as follows:
.*. (f he uses the ma+imin criterion, which kind of dwellin s will he decide to %uild9 /. sin le family $. apartments C. condominiums D! either sin le family or apartments -. either apartments or condos
.5. (f he uses the 3aplace criterion, which kind of dwellin s will he decide to %uild9 A! sin le family $. apartments C. condos D. either sin le family or apartments -. either apartments or condos
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.,. (f he uses the minima+ re ret criterion, which kind of dwellin s will he decide to %uild9 /. sin le family "! apartments C. condos D. either sin le family or apartments -. either apartments or condos
... (f he feels the chances of declinin , sta%le, and rowin population trends are *0I, 50I, and 10I, respecti!ely, which kind of houses will he decide to %uild9 A! sin le family $. apartments C. condos D. either sin le family or apartments -. either apartments or condos
.0. (f he feels the chances of declinin , sta%le, and rowin population trends are *0I, 50I, and 10I, respecti!ely, what is his e+pected !alue of perfect information9 /. B10.,000 $. B1'#,000 C. B1#',000 D. B ,5,000 E! B 55,000
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The owner of Tastee Cookies needs to decide whether to lease a small, medium, or lar e new retail outlet. She estimates that monthly profits will !ary with demand for her cookies as follows:
.1. (f she uses the ma+ima+ criterion, what si7e outlet will she decide to lease9 /. small $. medium C! lar e D. either small or medium -. either medium or lar e
00. (f she uses the ma+imin criterion, what si7e outlet will she decide to lease9 A! small $. medium C. lar e D. either small or medium -. either medium or lar e
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01. (f she uses the 3aplace criterion, what si7e outlet will she decide to lease9 /. small $. medium C. lar e D. either small or medium E! either medium or lar e
0#. (f she uses the minima+ re ret criterion, what si7e outlet will she decide to lease9 /. small "! medium C. lar e D. either small or medium -. either medium or lar e
0'. (f she feels there is a '0I chance that demand will %e hi h, what are the e+pected monthly profits for the outlet she will decide to lease9 /. B1,,00 "! B1,100 C. B1,000 D. B100 -. B500
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0*. (f she feels there is a '0I chance that demand will %e hi h, what is her e+pected payoff under certainty9 A! B1,,00 $. B1,100 C. B1,000 D. B100 -. B500
05. (f she feels there is a '0I chance that demand will %e hi h, what is her e+pected !alue of perfect information9 /. B1,,00 $. B1,100 C. B1,000 D. B100 E! B500
0,. Jor what ran e of pro%a%ility that demand will %e hi h, will she decide to lease the small facility9 A! 0 - .#5 $. 0 - .'' C. .#5 - .5 D. .'' - 1 -. .5 - 1
AACSB: AS Difficulty: #a$d TLO: ' Taxonomy: A))lication
5-'5
0.. Jor what ran e of pro%a%ility that demand will %e hi h, will she decide to lease the medium facility9 /. 0 - .#5 $. 0 - .'' C! .#5 - .5 D. .'' - 1 -. .5 - 1
00. Jor what ran e of pro%a%ility that demand will %e hi h, will she decide to lease the lar e facility9 /. 0 - .#5 $. 0 - .'' C. .#5 - .5 D. .'' - 1 E! .5 - 1
The ad!ertisin mana er for <oadside <estaurants, (nc. needs to decide whether to spend this month;s %ud et for ad!ertisin on print media, tele!ision, or a mi+ture of the two. She estimates that the cost per thousand 2hits2 >readers or !iewers? will !ary dependin upon the success of the new ca%le tele!ision network she plans to use, as follows:
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01. (f she uses the ma+ima+ criterion, which ad!ertisin strate y will she use9 /. print $. mi+ed C! tele!ision D. either print or mi+ed -. either mi+ed or tele!ision
10. (f she uses the ma+imin criterion, which ad!ertisin strate y will she use9 A! print $. mi+ed C. tele!ision D. either print or mi+ed -. either mi+ed or tele!ision
11. (f she uses the 3aplace criterion, which ad!ertisin strate y will she use9 /. print "! mi+ed C. tele!ision D. either print or mi+ed -. either mi+ed or tele!ision
5-'.
1#. (f she uses the minima+ re ret criterion, which ad!ertisin strate y will she use9 /. print "! mi+ed C. tele!ision D. either print or mi+ed -. either mi+ed or tele!ision
1'. (f she feels that there is a ,0I chance that the new ca%le network will %e successful, what is her e+pected cost >per thousand 2hits2? for the strate y she will select9 /. B '.*0 $. B *.,0 C! B 0.00 D. B 1.00 -. B10.00
1*. (f she feels that there is a ,0I chance that the new ca%le network will %e successful, what is her e+pected cost >per thousand 2hits2? under certainty9 /. B '.*0 "! B *.,0 C. B 0.00 D. B 1.00 -. B10.00
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15. (f she feels that there is a ,0I chance that the new ca%le network will %e successful, what is her e+pected !alue >per thousand 2hits2? of perfect information9 A! B '.*0 $. B *.,0 C. B 0.00 D. B 1.00 -. B10.00
1,. Jor what ran e of pro%a%ility that the new ca%le network will %e successful will she select the print media strate y9 A! 0 - .* $. 0 - .55 C. .* - .. D. .55 - 1 -. .. - 1
1.. Jor what ran e of pro%a%ility that the new ca%le network will %e successful will she select the mi+ed media strate y9 /. 0 - .* $. 0 - .55 C! .* - .. D. .55 - 1 -. .. - 1
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10. Jor what ran e of pro%a%ility that the new ca%le network will %e successful will she select the tele!ision media strate y9 /. 0 - .* $. 0 - .55 C. .* - .. D. .55 - 1 E! .. - 1
The head of operations for a mo!ie studio wants to determine which of two new scripts they should select for their ne+t maEor production. >Due to %ud etin constraints, only one new picture can %e undertaken at this time.? She feels that script )1 has a .0 percent chance of earnin a%out B10,000,000 o!er the lon run, %ut a '0 percent chance of losin B#,000,000. (f this mo!ie is successful, then a se"uel could also %e produced, with an 00 percent chance of earnin B5,000,000, %ut a #0 percent chance of losin B1,000,000. Kn the other hand, she feels that script )# has a ,0 percent chance of earnin B1#,000,000, %ut a *0 percent chance of losin B',000,000. (f successful, its se"uel would ha!e a 50 percent chance of earnin B0,000,000, %ut a 50 percent chance of losin B*,000,000. Kf course, in either case, if the ori inal mo!ie were a 2flop,2 then no se"uel would %e produced.
11. 8hat would %e the total payoff if script )1 were a success, %ut its se"uel were not9 /. B15,000,000 $. B10,000,000 C! B 1,000,000 D. B 5,000,000 -. B-1,000,000
AACSB: AS Difficulty: !edium TLO: ( Taxonomy: A))lication
5-*0
100. 8hat is the pro%a%ility that script )1 will %e a success, %ut its se"uel will not9 /. .0 $. .. C. .5, D. .# E! .1*
101. 8hat is the e+pected !alue of selectin script )19 /. B15,000,000 "! B 1,0,0,000 C. B 0,*00,000 D. B .,#00,000 -. B ,,000,000
10#. 8hat is the e+pected !alue of selectin script )#9 /. B15,000,000 $. B 1,0,0,000 C. B 0,*00,000 D! B .,#00,000 -. B ,,000,000
5-*1
10'. 8hat is the e+pected !alue for the optimum decision alternati!e9 /. B15,000,000 "! B 1,0,0,000 C. B 0,*00,000 D. B .,#00,000 -. B ,,000,000
Kne local hospital has Eust enou h space and funds presently a!aila%le to start either a cancer or heart research la%. (f administration decides on the cancer la%, there is a #0 percent chance of ettin B100,000 in outside fundin from the /merican Cancer Society ne+t year, and an 00 percent chance of ettin nothin . (f the cancer research la% is funded the first year, no additional outside fundin will %e a!aila%le the second year. Dowe!er, if it is not funded the first year, then mana ement estimates the chances are 50 percent it will et B100,000 the followin year, and 50 percent that it will et nothin a ain. (f, howe!er, =erciless;s mana ement decides to o with the heart la%, then there;s a 50 percent chance of ettin B50,000 in outside fundin from the /merican Deart /ssociation the first year and a 50 percent chan e of ettin nothin . (f the heart la% is funded the first year, mana ement estimates a *0 percent chance of ettin another B50,000 and a ,0 percent chance of ettin nothin additional the second year. (f it is not funded the first year, then mana ement estimates a ,0 percent chance for ettin B50,000 and a *0 percent chance for ettin nothin in the followin year. Jor %oth the cancer and heart research la%s, no further possi%le fundin is anticipated %eyond the first two years.
10*. 8hat would %e the total payoff if the heart la% were funded in %oth the first and second years9 /. B100,000 $. B ,0,000 C! B 50,000 D. B *0,000 -. B #0,000
5-*#
105. 8hat is the pro%a%ility that the heart la% will %e funded in %oth the first and second years9 /. .* $. .' C! .# D. .1 -. 0
10,. 8hat is the e+pected !alue for the decision alternati!e to select the cancer la%9 /. B100,000 "! B ,0,000 C. B 50,000 D. B *0,000 -. B #0,000
10.. 8hat is the e+pected !alue for the decision alternati!e to select the heart la%9 /. B100,000 $. B ,0,000 C! B 50,000 D. B *0,000 -. B #0,000
5-*'
100. 8hat is the e+pected !alue for the optimum decision alternati!e9 /. B100,000 "! B ,0,000 C. B 50,000 D. B *0,000 -. B #0,000
Two professors at a near%y uni!ersity want to co-author a new te+t%ook in either economics or statistics. They feel that if they write an economics %ook, they ha!e a 50 percent chance of placin it with a maEor pu%lisher, and it should ultimately sell a%out *0,000 copies. (f they can;t et a maEor pu%lisher to take it, then they feel they ha!e an 00 percent chance of placin it with a smaller pu%lisher, with ultimate sales of '0,000 copies. Kn the other hand, if they write a statistics %ook, they feel they ha!e a *0 percent chance of placin it with a maEor pu%lisher, and it should result in ultimate sales of a%out 50,000 copies. (f they can;t et a maEor pu%lisher to take it, they feel they ha!e a 50 percent chance of placin it with a smaller pu%lisher, with ultimate sales of '5,000 copies.
101. 8hat is the pro%a%ility that the economics %ook would wind up %ein placed with a smaller pu%lisher9 /. .0 $. .5 C! .* D. .# -. .1
5-**
110. 8hat is the pro%a%ility that the statistics %ook would wind up %ein placed with a smaller pu%lisher9 /. ., $. .5 C. .* D! .' -. 0
111. 8hat is the e+pected !alue for the decision alternati!e to write the economics %ook9 /. 50,000 copies $. *0,000 copies C! '#,000 copies D. '0,500 copies -. 10,500 copies
11#. 8hat is the e+pected !alue for the decision alternati!e to write the statistics %ook9 /. 50,000 copies $. *0,000 copies C. '#,000 copies D! '0,500 copies -. 10,500 copies
5-*5
11'. 8hat is the e+pected !alue for the optimum decision alternati!e9 /. 50,000 copies $. *0,000 copies C! '#,000 copies D. '0,500 copies -. 10,500 copies
Difficulty: !edium TLO: ( Taxonomy: A))lication
Essay Questions
11*. (f somehow you find out for certain that state of nature )* is oin to occur, which alternati!e will you select9 /@,
AACSB: AS Difficulty: !edium TLO: 1 Taxonomy: A))lication
5-*,
115. (f you are uncertain which state of nature will occur, and use the ma+imin criterion, which alternati!e will you select9 C@#
11,. (f you are uncertain which state of nature will occur, and use the ma+ima+ criterion, which alternati!e will you select9 /@,
11.. (f you are uncertain which state of nature will occur, and use the 3aplace criterion, which alternati!e will you select9 $@'
110. (f you are uncertain which state of nature will occur, and use the minima+ re ret criterion, which alternati!e will you select9 C@'
5-*.
111. (f you feel that 5>)1? @ .*, 5>)#? @ .', 5>)'? @ .#, and 5>)*? @ .1, which alternati!e will you select9 $C -4@#.1
1#0. (f you feel that 5>)1? @ .*, 5>)#? @ .', 5>)'? @ .#, and 5>)*? @ .1, what is your e+pected payoff under certainty9 -5C@*.1
1#1. (f you feel that 5>)1? @ .*, 5>)#? @ .', 5>)'? @ .#, and 5>)*? @ .1, what is your e+pected !alue of perfect information9 -45(@1.#
5-*0

Chap 005 S

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Chapter 05S - Supplement: Decision Theory

Chapter 05S Supplement: Decision Theory

AACSB: RT Difficulty: Easy TLO: 1 Taxonomy: Synthesis

Difficulty: Easy TLO: 1 Taxonomy: Knowled e

Difficulty: !edium TLO: 1 Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

Difficulty: !edium TLO: " Taxonomy: Knowled e

5. The !alue of perfect information is in!ersely related to losses predicted. FALSE

Difficulty: #a$d TLO: % Taxonomy: Knowled e

Difficulty: !edium TLO: " Taxonomy: Knowled e

Difficulty: !edium TLO: 1 Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

Difficulty: !edium TLO: 1 Taxonomy: Knowled e

1. (n decision theory, states of nature refer to possi%le future conditions. TRUE

Difficulty: Easy TLO: 1 Taxonomy: Knowled e

Difficulty: #a$d TLO: & Taxonomy: Knowled e

Difficulty: !edium TLO: & Taxonomy: Knowled e

Difficulty: !edium TLO: & Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

1'. The ma+ima+ approach is a pessimistic strate y. FALSE

Difficulty: !edium TLO: & Taxonomy: Knowled e

Difficulty: !edium TLO: & Taxonomy: Knowled e

Difficulty: !edium TLO: " Taxonomy: Knowled e

Difficulty: Easy TLO: " Taxonomy: Knowled e

AACSB: RT Difficulty: #a$d TLO: " Taxonomy: Synthesis

Chapter 05S - Supplement: Decision Theory

Difficulty: #a$d TLO: ' Taxonomy: Knowled e

Difficulty: !edium TLO: ' Taxonomy: Knowled e

Difficulty: !edium TLO: ( Taxonomy: Knowled e

Difficulty: !edium TLO: 1 Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

Difficulty: #a$d TLO: 1 Taxonomy: Knowled e

Difficulty: #a$d TLO: ' Taxonomy: Knowled e

AACSB: RT Difficulty: !edium TLO: ' Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

Difficulty: !edium TLO: 1 Taxonomy: Knowled e

Difficulty: !edium TLO: & Taxonomy: Knowled e

Difficulty: !edium TLO: & Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

Difficulty: !edium TLO: & Taxonomy: Knowled e

Difficulty: !edium TLO: & Taxonomy: Knowled e

Difficulty: !edium TLO: & Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

Difficulty: #a$d TLO: " Taxonomy: Knowled e

Difficulty: #a$d TLO: & Taxonomy: Knowled e

Difficulty: !edium TLO: " Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

Difficulty: !edium TLO: ( Taxonomy: Knowled e

AACSB: AS Difficulty: #a$d TLO: % Taxonomy: A))lication

AACSB: AS Difficulty: !edium TLO: % Taxonomy: A))lication

Chapter 05S - Supplement: Decision Theory

Difficulty: #a$d TLO: ' Taxonomy: Knowled e

Chapter 05S - Supplement: Decision Theory

Chapter 05S - Supplement: Decision Theory

>/? =a+imin: /lt. ' >$? <e ret matri+ is:

Chapter 05S - Supplement: Decision Theory

Chapter 05S - Supplement: Decision Theory

AACSB: AS Difficulty: !edium TLO: &* "* ' Taxonomy: A))lication

AACSB: AS Difficulty: !edium TLO: &* " Taxonomy: A))lication

Chapter 05S - Supplement: Decision Theory

Chapter 05S - Supplement: Decision Theory

/lternati!e / >e+pected monetary !alue @ B1#.5H? should %e chosen.