Chapter 13 - Decision Analysis

True / False

1. Sample information with an efficiency rating of 100% is perfect information.

a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Efficiency of sample information

2. States of nature should be defined so that one and only one will actually occur.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Structuring the decision
process

3. Decision alternatives are structured so that several could occur simultaneously.

a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Structuring the decision
problem

4. Square nodes in a decision tree indicate that a decision must be made.

a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Decision trees

5. Circular nodes in a decision tree indicate that it would be incorrect to choose a path from the node.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Decision trees

6. Risk analysis helps the decision maker recognize the difference between the expected value of a decision alternative
and the payoff that may actually occur.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Risk analysis
Cengage Learning Testing, Powered by Cognero Page 1
Chapter 13 - Decision Analysis

7. The expected value of an alternative can never be negative.

a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Decision making with probabilities

8. Expected value is the sum of the weighted payoff possibilities at a circular node in a decision tree.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Decision making with probabilities

9. EVPI is always greater than or equal to EVSI.

a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Expected value of sample information

10. After all probabilities and payoffs are placed on a decision tree, the decision maker calculates expected values at state
of nature nodes and makes selections at decision nodes.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Developing a decision
strategy

11. A decision strategy is a sequence of decisions and chance outcomes, where the decisions chosen depend on the yet to
be determined outcomes of chance events.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Decision strategy

12. EVPI equals the expected regret associated with the minimax decision.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Minimax regret approach

Cengage Learning Testing, Powered by Cognero Page 2

Chapter 13 - Decision Analysis
13. The expected value approach is more appropriate for a one-time decision than a repetitive decision.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Decision making with probabilities

14. Maximizing the expected payoff and minimizing the expected opportunity loss result in the same recommended
decision.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Minimax regret approach

15. The expected value of sample information can never be less than the expected value of perfect information.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Expected value of sample information

16. The minimum expected opportunity loss provides the best decision, regardless of whether the decision analysis
involves minimization or maximization.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Opportunity
loss

17. The primary value of decision trees is as a useful way of organizing how operations managers think about complex
multiphase decisions.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Decision trees

18. A high efficiency rating indicates that the sample information is almost as good as perfect information.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Efficiency of sample information

Cengage Learning Testing, Powered by Cognero Page 3

Chapter 13 - Decision Analysis
19. When the expected value approach is used to select a decision alternative, the payoff that actually occurs will usually
have a value different from the expected value.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Decision making with probabilities

20. The decision alternative with the best expected monetary value will always be the most desirable decision.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Meaning of
utility

21. When monetary value is not the sole measure of the true worth of the outcome to the decision maker, monetary value
should be replaced by utility.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Meaning of
utility

22. The outcome with the highest payoff will also have the highest utility.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Developing utilities for monetary
payoffs

23. Expected utility is a particularly useful tool when payoffs stay in a range considered reasonable by the decision maker.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Meaning of
utility

24. To assign utilities, consider the best and worst payoffs in the entire decision situation.
a. True
b. False
ANSWER: True
POINTS: 1
Cengage Learning Testing, Powered by Cognero Page 4
Chapter 13 - Decision Analysis
TOPICS: Developing utilities for monetary
payoffs

25. A risk avoider will have a concave utility function.

a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Developing utilities for monetary
payoffs

26. The expected utility is the utility of the expected monetary value.

a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Expected utility approach

27. The risk premium is never negative for a conservative decision maker.

a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Developing utilities for monetary
payoffs

28. The risk neutral decision maker will have the same indications from the expected value and expected utility
approaches.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Expected monetary value versus expected utility

29. The utility function for a risk avoider typically shows a diminishing marginal return for money.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Developing utilities for monetary
payoffs

30. The expected monetary value approach and the expected utility approach to decision making usually result in the same
decision choice unless extreme payoffs are involved.
a. True
b. False
Cengage Learning Testing, Powered by Cognero Page 5
Chapter 13 - Decision Analysis
ANSWER: True
POINTS: 1
TOPICS: Utility and decision making

31. A risk neutral decision maker will have a linear utility function.
a. True
b. False
ANSWER: True
POINTS: 1
TOPICS: Developing utilities for monetary
payoffs

32. Given two decision makers, one risk neutral and the other a risk avoider, the risk avoider will always give a lower
utility value for a given outcome.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Developing utilities for monetary
payoffs

33. When the payoffs become extreme, most decision makers are satisfied with the decision that provides the best
expected monetary value.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Meaning of
utility

Multiple Choice

34. The options from which a decision maker chooses a course of action are
a. called the decision alternatives.
b. under the control of the decision
maker.
c. not the same as the states of nature.
d. All of the alternatives are true.
ANSWER: d
POINTS: 1
TOPICS: Structuring the decision
problem

35. States of nature
a. can describe uncontrollable natural events such as floods or freezing temperatures.
b. can be selected by the decision maker.

Cengage Learning Testing, Powered by Cognero Page 6

Chapter 13 - Decision Analysis
c. cannot be enumerated by the decision maker.
d. All of the alternatives are true.
ANSWER: a
POINTS: 1
TOPICS: Structuring the decision
problem

36. A payoff
a. is always measured in profit.
b. is always measured in cost.
c. exists for each pair of decision alternative and state of
nature.
d. exists for each state of nature.
ANSWER: c
POINTS: 1
TOPICS: Payoff tables

37. Making a good decision

a. requires probabilities for all states of nature.
b. requires a clear understanding of decision alternatives, states of nature, and
payoffs.
c. implies that a desirable outcome will occur.
d. All of the alternatives are true.
ANSWER: b
POINTS: 1
TOPICS: Decision making without
probabilities

38. A decision tree

a. presents all decision alternatives first and follows them with all states of nature.
b. presents all states of nature first and follows them with all decision alternatives.
c. alternates the decision alternatives and states of nature.
d. arranges decision alternatives and states of nature in their natural chronological
order.
ANSWER: d
POINTS: 1
TOPICS: Decision trees

39. Which of the methods for decision making best protects the decision maker from undesirable results?
a. the optimistic approach
b. the conservative approach
c. minimum regret
d. minimax regret
ANSWER: b
POINTS: 1

Cengage Learning Testing, Powered by Cognero Page 7

Chapter 13 - Decision Analysis
TOPICS: Conservative approach

40. Sensitivity analysis considers

a. how sensitive the decision maker is to risk.
b. changes in the number of states of nature.
c. changes in the values of the payoffs.
d. changes in the available alternatives.
ANSWER: c
POINTS: 1
TOPICS: Sensitivity analysis

41. To find the EVSI,

a. use the EVPI to calculate sample information probabilities.
b. use indicator probabilities to calculate prior probabilities.
c. use prior and sample information probabilities to calculate revised
probabilities.
d. use sample information to revise the sample information probabilities.
ANSWER: c
POINTS: 1
TOPICS: Expected value of sample information

42. If P(high) = .3, P(low) = .7, P(favorable | high) = .9, and P(unfavorable | low) = .6, then P(favorable) =
a. .10
b. .27
c. .30
d. .55
ANSWER: d
POINTS: 1
TOPICS: Conditional probability

43. The efficiency of sample information is

a. EVSI*(100%)
b. EVSI/EVPI*(100%)
c. EVwoSI/EVwoPI*(100%)
d. EVwSI/EVwoSI*(100%)
ANSWER: b
POINTS: 1
TOPICS: Efficiency of sample information

44. Decision tree probabilities refer to

a. the probability of finding the optimal strategy
b. the probability of the decision being made
c. the probability of overlooked choices
d. the probability of an uncertain event
occurring
Cengage Learning Testing, Powered by Cognero Page 8
Chapter 13 - Decision Analysis
ANSWER: d
POINTS: 1
TOPICS: Decision trees

45. For a maximization problem, the conservative approach is often referred to as the

a. minimax approach.
b. maximin approach.
c. maximax approach.
d. minimin approach.
ANSWER: b
POINTS: 1
TOPICS: Decision making without
probabilities

46. For a minimization problem, the optimistic approach is often referred to as the

a. minimax approach
b. maximin approach
c. maximax approach
d. minimin approach
ANSWER: d
POINTS: 1
TOPICS: Decision making without
probabilities

47. For a maximization problem, the optimistic approach is often referred to as the

a. minimax approach
b. maximin approach
c. maximax approach
d. minimin approach
ANSWER: c
POINTS: 1
TOPICS: Decision making without
probabilities

48. For a minimization problem, the conservative approach is often referred to as the

a. minimax approach
b. maximin approach
c. maximax approach
d. minimin approach
ANSWER: a
POINTS: 1
TOPICS: Decision making without
probabilities

49. In an influence diagram, decision nodes are represented by

Cengage Learning Testing, Powered by Cognero Page 9

Chapter 13 - Decision Analysis
a. circles or ovals
b. squares or rectangles
c. diamonds
d. triangles
ANSWER: b
POINTS: 1
TOPICS: Influence diagram

50. Which of the following approaches to decision making requires knowledge of the probabilities of the states of nature?
a. minimax regret
b. maximin
c. expected value
d. conservative
ANSWER: c
POINTS: 1
TOPICS: Decision making with probabilities

51. Decision tree probabilities refer to the probability of

a. an uncertain event occurring.
b. the decision being made.
c. finding an optimal value.
d. overlooked choices.
ANSWER: a
POINTS: 1
TOPICS: Decision making with probabilities

52. Which of the following is not an advantage of using decision tree analysis?

a. the ability to see clearly what decisions must be made
b. the ability to see clearly in what sequence the decisions must occur
c. the ability to see clearly the interdependence of decisions
d. the ability to see clearly the future outcome of a decision
ANSWER: d
POINTS: 1
TOPICS: Decision making with probabilities

53. A decision tree provides

a. a heuristic method for analyzing decisions.
b. a deterministic approach to decision analysis.
c. the absolute value of the decision.
d. an objective way of determining the relative value of each decision
alternative.
ANSWER: d
POINTS: 1
TOPICS: Decision trees

Cengage Learning Testing, Powered by Cognero Page 10

Chapter 13 - Decision Analysis
54. The approach to determining the optimal decision strategy involves
a. a forward (left to right) pass through the decision tree.
b. a backward (right to left) pass through the decision tree.
c. choosing the outcome of a chance event with the greatest
probability.
d. choosing the outcome of a chance event with the greatest payoff.
ANSWER: b
POINTS: 1
TOPICS: Decision strategy

55. The difference between the expected value of an optimal strategy based on sample information and the "best"
expected value without any sample information is called the
a. information sensitivity.
b. expected value of sample information.
c. expected value of perfect information.
d. efficiency of sample information.
ANSWER: b
POINTS: 1
TOPICS: Expected value of sample information

56. When consequences are measured on a scale that reflects a decision maker's attitude toward profit, loss, and risk,
payoffs are replaced by
a. utility values.
b. multicriteria measures.
c. sample information.
d. opportunity loss.
ANSWER: a
POINTS: 1
TOPICS: Meaning of
utility

57. The purchase of insurance and lottery tickets shows that people make decisions based on
a. expected value.
b. sample information.
c. utility.
d. maximum likelihood.
ANSWER: c
POINTS: 1
TOPICS: Meaning of
utility

58. The expected utility approach

a. does not require probabilities.
b. leads to the same decision as the expected value approach.
c. is most useful when excessively large or small payoffs are
possible.
Cengage Learning Testing, Powered by Cognero Page 11
Chapter 13 - Decision Analysis
d. requires a decision tree.
ANSWER: c
POINTS: 1
TOPICS: Expected utility approach

59. Utility reflects the decision maker's attitude toward

a. probability and profit.
b. profit, loss, and risk.
c. risk and regret.
d. probability and
regret.
ANSWER: b
POINTS: 1
TOPICS: Meaning of
utility

60. Values of utility
a. must be between 0 and 1.
b. must be between 0 and 10.
c. must be nonnegative.
d. must increase as the payoff improves.
ANSWER: d
POINTS: 1
TOPICS: Utility functions

61. If the payoff from outcome A is twice the payoff from outcome B, then the ratio of these utilities will be
a. 2 to 1.
b. less than 2 to 1.
c. more than 2 to 1.
d. unknown without further information.
ANSWER: d
POINTS: 1
TOPICS: Utility functions

62. The probability for which a decision maker cannot choose between a certain amount and a lottery based on that
probability is
a. the indifference
probability.
b. the lottery probability.
c. the uncertain probability.
d. the utility probability.
ANSWER: a
POINTS: 1
TOPICS: Utility functions

Cengage Learning Testing, Powered by Cognero Page 12

Chapter 13 - Decision Analysis
63. A decision maker has chosen .4 as the probability for which he cannot choose between a certain loss of 10,000 and the
lottery p(-25000) + (1 - p)(5000). If the utility of -25,000 is 0 and of 5000 is 1, then the utility of -10,000 is
a. .5
b. .6
c. .4
d. 4
ANSWER: b
POINTS: 1
TOPICS: Utility functions

64. When the decision maker prefers a guaranteed payoff value that is smaller than the expected value of the lottery, the
decision maker is
a. a risk avoider.
b. a risk taker.
c. an optimist.
d. an optimizer.
ANSWER: a
POINTS: 1
TOPICS: Risk avoiders versus risk takers

65. A decision maker whose utility function graphs as a straight line is

a. conservative.
b. a risk taker.
c. risk neutral.
d. a risk avoider.
ANSWER: c
POINTS: 1
TOPICS: Risk avoiders versus risk takers

66. When the utility function for a risk-neutral decision maker is graphed (with monetary value on the horizontal axis and
utility on the vertical axis),  the function appears as
a. a convex curve.
b. a concave curve.
c. an 'S' curve.
d. a straight line.
ANSWER: d
POINTS: 1
TOPICS: Risk avoiders versus risk takers

Subjective Short Answer

67. Jim has been employed at Gold Key Realty at a salary of $2,000 per month during the past year. Because Jim is
considered to be a top salesman, the manager of Gold Key is offering him one of three salary plans for the next year: (1) a
25% raise to $2,500 per month; (2) a base salary of $1,000 plus $600 per house sold; or, (3) a straight commission of
$1,000 per house sold. Over the past year, Jim has sold up to 6 homes in a month.
a.  Compute the monthly salary payoff table for Jim.
Cengage Learning Testing, Powered by Cognero Page 13
Chapter 13 - Decision Analysis
b.  For this payoff table find Jim's optimal decision using: (1) the conservative approach, (2) minimax regret
approach.
c.  Suppose that during the past year the following is Jim's distribution of home sales. If one assumes that this a
typical distribution for Jim's monthly sales, which salary plan should Jim select?
Home Sales Number of Months
0 1
1 2
2 1
3 2
4 1
5 3
6 2
ANSWER:  
a. There are three decision alternatives (salary plans) and seven states of nature (the number of houses
sold monthly).
PAYOFF TABLE Number of Homes Sold
0 1 2 3 4 5 6
Salary Plan I 2500 2500 2500 2500 2500 2500 2500
Salary Plan II 1000 1600 2200 2800 3400 4000 4600
Salary Plan III 0 1000 2000 3000 4000 5000 6000

b. (1) Conservative Approach (Maximin): Plan I

REGRET TABLE Number of Homes Sold
0 1 2 3 4 5 6
Salary Plan I 0 0 0 500 1500 2500 3500
Salary Plan II 1500 900 300 200 600 1000 1400
Salary Plan III 2500 1500 500 0 0 0 0
(2) Minimax Regret Approach: Plan II

c. Use the relative frequency method for determining the probabilities.

Using the EV approach: EV(Plan I) = 2500, EV(Plan II) = 3050, EV(Plan III) = 3417;
Choose Plan III.
POINTS: 1
TOPICS: Decision making with and without probabilities

68. East West Distributing is in the process of trying to determine where they should schedule next year's production of a
popular line of kitchen utensils that they distribute. Manufacturers in four different countries have submitted bids to East
West. However, a pending trade bill in Congress will greatly affect the cost to East West due to proposed tariffs, favorable
trading status, etc.

After careful analysis, East West has determined the following cost breakdown for the four manufacturers (in $1,000's)
based on whether or not the trade bill passes:
Bill Passes Bill Fails
Country A 260 210
Country B 320 160
Country C 240 240
Country D 275 210

If East West estimates that there is a 40% chance of the bill passing, which country should
a.
they choose for manufacturing?
b. Over what range of values for the "bill passing" will the solution in part (a) remain optimal?
Cengage Learning Testing, Powered by Cognero Page 14
Chapter 13 - Decision Analysis
ANSWER:
Using EV approach: EV(A) = 230, EV(B) = 224, EV(C) = 240; Choose Country B (lowest
a.
EV)
As long as the probability of the bill passing is less than .455, East West should choose
b.
Country B.

POINTS: 1
TOPICS: Decision making with probabilities

69. Transrail is bidding on a project that it figures will cost $400,000 to perform. Using a 25% markup, it will charge
$500,000, netting a profit of $100,000. However, it has been learned that another company, Rail Freight, is also
considering bidding on the project. If Rail Freight does submit a bid, it figures to be a bid of about $470,000. Transrail
really wants this project and is considering a bid with only a 15% markup to $460,000 to ensure winning regardless of
whether or not Rail Freight submits a bid.
a. Prepare a profit payoff table from Transrail's point of view.
b. What decision would be made if Transrail were conservative?
If Rail Freight is known to submit bids on only 25% of the projects it considers, what
c.
decision should Transrail make?
Given the information in (c), how much would a corporate spy be worth to Transrail to find
d.
out if Rail Freight will bid?
ANSWER:
a. Rail Freight
Transrail Bid $470,000 Doesn't Bid
Bid $500,000 $0 $100,000
Bid $460,000 $60,000 $  60,000
b.  Bid $460,000
c.  Bid $500,000
d.  $15,000
POINTS: 1
TOPICS: Decision making with and without probabilities

70. The Super Cola Company must decide whether or not to introduce a new diet soft drink. Management feels that if it
Cengage Learning Testing, Powered by Cognero Page 15
Chapter 13 - Decision Analysis
does introduce the diet soda it will yield a profit of $1 million if sales are around 100 million, a profit of $200,000 if sales
are around 50 million, or it will lose $2 million if sales are only around 1 million bottles. If Super Cola does not market
the new diet soda, it will suffer a loss of $400,000.
a. Construct a payoff table for this problem.
b. Construct a regret table for this problem.
Should Super Cola introduce the soda if the company: (1) is conservative; (2) is optimistic;
c.
(3) wants to minimize its maximum disappointment?
An internal marketing research study has found P(100 million in sales) = 1/3; P(50 million in
d.
sales) = 1/2; P(1 million in sales) = 1/6. Should Super Cola introduce the new diet soda?
A consulting firm can perform a more thorough study for $275,000. Should management
e.
have this study performed?
ANSWER:
PAYOFF
a. Sales ($millions)
TABLE
100 50 1
Introduce $1,000,000   $200,000 −$2,000,000
Do Not
−$400,000 −$400,000    −$400,000
Introduce
REGRET
b. Sales ($millions)
TABLE
100 50 1
Introduce $0   $0 $1,600,000
Do Not
$1,400,000 $600,000   $0
Introduce
c.   (1) do not introduce; (2) introduce; (3) do not introduce
d.   Yes
e.   No
POINTS: 1
TOPICS: Decision making with and without probabilities

71. Super Cola is also considering the introduction of a root beer drink. The company feels that the probability that the
product will be a success is .6. The payoff table is as follows:

Success (s1) Failure (s2)

Produce (d1)   $250,000 −$300,000
Do Not Produce (d2) −$  50,000 −$  20,000

The company has a choice of two research firms to obtain information for this product. Stanton Marketing has market
indicators, I1 and I2 for which P(I1 | s1) = .7 and P(I1 | s2) = .4. New World Marketing has indicators J1 and J2 for which
P(J1 | s1) = .6 and P(J1 | s2) = .3.
a. What is the optimal decision if neither firm is used? Over what probability of success range
is this decision optimal?
b. What is the EVPI?
c. Find the EVSIs and efficiencies for Stanton and New World.
d. If both firms charge $5,000, which firm should be hired?
e. If Stanton charges $10,000 and New World charges $4,000, which firm should Super Cola
hire? Why?
ANSWER:
a. Introduce root beer; p ≤ .483
b. EVPI = $112,000
Cengage Learning Testing, Powered by Cognero Page 16
Chapter 13 - Decision Analysis
NOTE: The answers to (c)-(e) are very sensitive to roundoff error.
Figures in parentheses are for two decimal places only.
c. Stanton: EVSI = $13,200 ($11,862)
Efficiency = .118 (.106)
New World: EVSI = $6,400 ($6,424)
Efficiency = .057 (.057)
d. Hire Stanton (Stanton)
e. Hire New World (Stanton)
POINTS: 1
TOPICS: Computing branch probabilities

72. Dollar Department Stores has just acquired the chain of Wenthrope and Sons Custom Jewelers. Dollar has received an
offer from Harris Diamonds to purchase the Wenthrope store on Grove Street for $120,000. Dollar has determined
probability estimates of the store's future profitability, based on economic outcomes, as: P($80,000) = .2,
P($100,000) = .3, P($120,000) = .1, and P($140,000) = .4.
a. Should Dollar sell the store on Grove Street?
b. What is the EVPI?
Dollar can have an economic forecast performed, costing $10,000, that produces indicators
c. I1 and I2, for which P(I1 | 80,000) = .1; P(I1 | 100,000) = .2; P(I1 | 120,000) = .6; P(I1 |
140,000) = .3. Should Dollar purchase the forecast?
ANSWER:
a. Yes, Dollar should sell store
b. EVPI = $8,000
c. No; survey cost exceeds EVPI
POINTS: 1
TOPICS: Computing branch probabilities

73. An appliance dealer must decide how many (if any) new microwave ovens to order for next month. The ovens cost
$220 and sell for $300. Because the oven company is coming out with a new product line in two months, any ovens not
sold next month will have to be sold at the dealer's half price clearance sale. Additionally, the appliance dealer feels he
suffers a loss of $25 for every oven demanded when he is out of stock. On the basis of past months' sales data, the dealer
estimates the probabilities of monthly demand (D) for 0, 1, 2, or 3 ovens to be .3, .4, .2, and .1, respectively.

The dealer is considering conducting a telephone survey on the customers' attitudes towards microwave ovens. The results
of the survey will either be favorable (F), unfavorable (U) or no opinion (N). The dealer's probability estimates for the
survey results based on the number of units demanded are:

P(F | D = 0) = .1 P(F | D = 2) = .3 P(U | D = 0) = .8 P(U | D = 2) = .1

P(F | D = 1) = .2 P(F | D = 3) = .9 P(U | D = 1) = .3 P(U | D = 3) = .1

a. What is the dealer's optimal decision without conducting the survey?

b. What is the EVPI?
c. Based on the survey results what is the optimal decision strategy for the dealer?
d. What is the maximum amount he should pay for this survey?
ANSWER:
          Demand For Ovens
Ovens Ordered 0 1 2 3
0       0 −25 −50 −75
1   −70   80   55   30
2 −140   10 160 135
3 −210 −60 90 240

Cengage Learning Testing, Powered by Cognero Page 17

Chapter 13 - Decision Analysis

a. Order one oven: EV = $25.00

b. EVPI = $63.00
c. Favorable: order 2; Unfavorable: order 0; No opinion: order 1
d. EVSI = $9.10
POINTS: 1
TOPICS: Computing branch probabilities

74. Lakewood Fashions must decide how many lots of assorted ski wear to order for its three stores. Information on
pricing, sales, and inventory costs has led to the following payoff table, in thousands.

Demand
Order Size Low Medium High
1 lot 12 15 15
2 lots 9 25 35
3 lots 6 35 60

a. What decision should be made by the optimist?

b. What decision should be made by the conservative?
c. What decision should be made using minimax regret?
ANSWER:
a. 3 lots
b. 1 lot
c. 3 lots
Regret Table

Order Demand Maximum

Size Low Medium High Regret
1 lot 0 20 45 45
2 lots 3 10 25 25
3 lots 6   0   0   6
POINTS: 1
TOPICS: Decision making without probabilities

75. The table shows both prospective profits and losses for a company, depending on what decision is made and what
state of nature occurs. Use the information to determine what the company should do.

State of Nature
Decision s1 s2 s3
d1   30   80 -30
d2 100   30 -40
d3 -80 -10 120
d4   20   20   20

a. if an optimistic strategy is used.

b. if a conservative strategy is used.
c. if minimax regret is the strategy.
ANSWER:
a.  d3

Cengage Learning Testing, Powered by Cognero Page 18

Chapter 13 - Decision Analysis

b.  d1
c.  d4

Regret Table:
State of Nature  Maximum
Decision s1 s2 s3 Regret
d1   70   0 150 150
d2     0 50 160 160
d3 180 90     0 180
d4   80 60 100 100
POINTS: 1
TOPICS: Decision making without probabilities

76. A payoff table is given as

State of Nature
Decision s1 s2 s3
d1 10  8 6
d2 14 15 2
d3  7  8 9

a. What decision should be made by the optimistic decision maker?

b. What decision should be made by the conservative decision maker?
c. What decision should be made under minimax regret?
d. If the probabilities of s1, s2, and s3 are .2, .4, and .4, respectively, then what decision should
be made under expected value?
e. What is the EVPI?
ANSWER:
a. d2
b. d3
c. a three way tie
d. EV(d1) = 7.6
EV(d2) = 9.6 (the best)
EV(d3) = 8.2
e. EVPI = 12.4 − 9.6 = 2.8
POINTS: 1
TOPICS: Decision making with and without probabilities

77. A payoff table is given as

State of Nature
Decision s1 s2 s3
d1 250   750   500
d2 300 -250 1200
d3 500   500   600

Cengage Learning Testing, Powered by Cognero Page 19

Chapter 13 - Decision Analysis
a. What choice should be made by the optimistic decision maker?
b. What choice should be made by the conservative decision maker?
c. What decision should be made under minimax regret?
d. If the probabilities of d1, d2, and d3 are .2, .5, and .3, respectively, then what choice should
be made under expected value?
e. What is the EVPI?
ANSWER:
a. d2
b. d3
c. d1
d. EV(d1) = 695 (the best)
EV(d2) = 385
EV(d 3) = 500
e. EVPI = 925 − 695 = 230
POINTS: 1
TOPICS: Decision making with and without probabilities

78. A decision maker has developed the following decision tree. How sensitive is the choice between N and P to the
probabilities of states of nature U and V?

ANSWER: Choose N if p ≤ .78.

POINTS: 1
TOPICS: Sensitivity analysis

79. If p is the probability of Event 1 and (1 − p) is the probability of Event 2, for what values of p would you choose A?
B? C? Values in the table are payoffs.
Choice/Event Event 1 Event 2
A 0 20
B 4 16
C 8   0
ANSWER: Choose A if p ≤ .5, choose B is .5 ≤ p ≤ .8, and choose C if p ≥ .8.
POINTS: 1
TOPICS: Sensitivity analysis

80. Fold back the decision tree and state what strategy should be followed.

Cengage Learning Testing, Powered by Cognero Page 20

Chapter 13 - Decision Analysis

ANSWER:

Cengage Learning Testing, Powered by Cognero Page 21

Chapter 13 - Decision Analysis
Strategy: Select A. If C happens, select H. If D happens, you are done. If E happens, select
K.
POINTS: 1
TOPICS: Expected value and decision trees

81. Fold back this decision tree. Clearly state the decision strategy you determine.

ANSWER:

Choose A. If F happens, choose K.

POINTS: 1
TOPICS: Expected value and decision trees

82. If sample information is obtained, the result of the sample information will be either positive or negative. No matter
which result occurs, the choice to select option A or option B exists. And no matter which option is chosen, the eventual
outcome will be good or poor. Complete the table.
Sample States of Prior Conditional Joint Posterior
Cengage Learning Testing, Powered by Cognero Page 22
Chapter 13 - Decision Analysis
Result Nature Probabilities Probabilities Probabilities Probabilities
Positive good .7 P(positive | good) = .8
poor .3 P(positive | poor) = .1
Negative good .7 P(negative | good) =
poor .3 P(negative | poor) =
ANSWER:
Sample States of Prior Conditional Joint Posterior
Result Nature Probabilities Probabilities Probabilities Probabilities
Positive good .7 P(positive | good) = .8 .56 .9492
poor .3 P(positive | poor) = .1 .03 .0508
Negative good .7 P(negative | good) = .2 .14 .3415
poor .3 P(negative | poor) = .9 .27 .6585
POINTS: 1
TOPICS: Posterior probabilities

83. Use graphical sensitivity analysis to determine the range of values of the probability of state of nature s 1 over which
each of the decision alternatives has its largest expected value.
State of Nature
Decision s1 s2
d1   8 10
d2   4 16
d3 10   0
ANSWER: EV(d1) and EV(d2) intersect at p = .6. EV(d1) and EV(d3) intersect at p = .8333. Therefore when 0 ≤ p ≤ .6,
choose d2. When .6 ≤ p ≤ .8333, choose d1. When p ≥ .8333, choose d3.

POINTS: 1
TOPICS: Graphical sensitivity analysis

84. Dollar Department Stores has received an offer from Harris Diamonds to purchase Dollar's store on Grove Street for
$120,000. Dollar has determined probability estimates of the store's future profitability, based on economic outcomes, as:
P($80,000) = .2, P($100,000) = .3, P($120,000) = .1, and P($140,000) = .4.
a. Should Dollar sell the store on Grove Street?
b. What is the EVPI?
Dollar can have an economic forecast performed, costing $10,000, that produces indicators
c. I1 and I2, for which P(I1 | 80,000) = .1; P(I1 | 100,000) = .2; P(I1 | 120,000) = .6; P(I1 |
140,000) = .3. Should Dollar purchase the forecast?
ANSWER:
a. Yes, Dollar should sell store.
Cengage Learning Testing, Powered by Cognero Page 23
Chapter 13 - Decision Analysis
b. EVPI = $8,000
c. No; survey cost exceeds EVPI.
POINTS: 1
TOPICS: Posterior probabilities

85. Characterize each of the non-probabilistic approaches to decision making (i.e. - minimin, minimax, maximin, and
maximax) in terms of it relating to a minimization or maximization problem and whether it is a pessimistic or optimistic
approach.
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Decision making without
probabilities

86. 
A paint company has three sources for buying bright red pigment for their paints: Vietnam, Taiwan, or Thailand.
Unfortunately, the pigment is made from a bush whose annual growth is heavily dependent upon the amount of rainfall
during the growing season. The tables below show probabilities and prices for wet, dry and normal growing seasons:

                               Probabilities
                        Wet      Dry      Normal
Vietnam            .5          .2          .3
Taiwan              .6          .3          .1
Thailand           .4          .4           .2

                              Price/Pound ($)

                        Wet      Dry      Normal
Vietnam           .95       1.10       1.00
Taiwan             .85       1.20         .98
Thailand          .90        1.15       1.05

What country should the company select and what is the expected value (price) associated with it?
ANSWER:
EV (Vietnam) = .5(.95) + .2(l.10) + .3(1.00) = $.995
EV (Taiwan) = .6(.85) + .3(l.20) + .1(.98) = $.968
EV (Thailand) = .4(.90) + .4(1.15) + .2(l.05) = $1.03

Select Taiwan, because it has the lowest EV.

POINTS: 1
TOPICS: Expected value and decision trees

87. 
A regional fast-food restaurant is considering an expansion program. The major factor influencing the success of such a
program is the future level of interest rates. It is estimated that there is a 20 percent chance that interest rates will increase
by 2 percentage points, a 50 percent chance that they will remain the same, and a 30 percent chance that they will
decrease by 2 percentage points. The alternatives they are considering and possible payoffs are shown in the table below. 
Which alternative is best, based on expected value?

                                      Rates up                  Rates                Rates down

                                      2 percent             unchanged             2 percent
Build 50 restaurants     -$200,000              $50,000               $150,000
Build 25 restaurants     -$115,000              $26,000                 $80,000
Cengage Learning Testing, Powered by Cognero Page 24
Chapter 13 - Decision Analysis
Do nothing                     -$70,000                     0                       $5,000
ANSWER:
EV (A--50 restaurants) = .2(-200,000) + .5(50,000) + .3(150,000) = $30,000
EV (B--25 restaurants) = .2(-115,000) + .5(26,000) + .3(80,000) = $14,000
EV (C--do nothing) = .2(-70,000) + .5(0) + .3(5,000) = -$12,500
The company should build 50 restaurants; EV of $30,000
POINTS: 1
TOPICS: Expected value and decision trees

88. A chemical company is trying to decide whether to build a pilot plant now for a new chemical process or to build the
full plant now. If they build a pilot plant now, they could expand it later to a full plant or license the plant to another
company. It would cost them $2 million to build the pilot plant and another $2 million later to expand it. If they build the
full plant now it would cost $3.5 million to construct.

The returns they expect to get from the full production plant depend upon the market. They estimate there is a 60% chance
the market will be robust, a 30% chance it will remain stable, and a 10% chance it will become stagnate. The returns are
estimated to be $5 million if it is robust, $3 million if it is stable, and $1 million if it is stagnate.

Before they expand the pilot plant, they plan to conduct a comprehensive study. Based on past experience, they expect the
study to report a 60% chance of favorable outcome for expansion and a 40% unfavorable chance. In either case they will
have to decide whether to expand to a full plant or license the pilot plant. If the report is favorable and they license it, they
expect to get $3 million. However, if the report is unfavorable and they license it, they will only get $1 million.

Develop a decision tree for this problem and determine the optimal decision strategy.
ANSWER:

Cengage Learning Testing, Powered by Cognero Page 25

Chapter 13 - Decision Analysis

Company should build pilot plant.  If report is unfavorable, company should expand.  If report is favorable,
company should license.  EV of $600,000.
POINTS: 1
TOPICS: Expected value and decision trees

89. 
A manufacturing company is considering expanding its production capacity to meet a growing demand for its product line
of air fresheners.  The alternatives are to build a new plant, expand the old plant, or do nothing.  The marketing
department estimates a 35 percent probability of a market upturn, a 40 percent probability of a stable market, and a 25
percent probability of a market downturn.  Georgia Swain, the firm's capital appropriations analyst, estimates the
following annual returns for these alternatives:

Cengage Learning Testing, Powered by Cognero Page 26

Chapter 13 - Decision Analysis

Market Stable Market

Upturn Market Downturn
Build new plant $690,000 $(130,000) $(150,000)
Expand old plant   490,000    (45,000)    (65,000)
Do nothing     50,000              0    (20,000)

a.   Use a decision tree analysis to analyze these decision alternatives.

b.   What should the company do?
c.   What returns will accrue to the company if your recommendation is followed?
ANSWER:
a.

b.   Decision:  Build the new plant

c.   Returns to accrue:  $690,000; ($130,000); or ($150,000)
POINTS: 1
TOPICS: Expected value and decision trees

90. 
The Sunshine Manufacturing Company has developed a unique new product and must now decide between two facility
plans. The first alternative is to build a large new facility immediately.  The second alternative is to build a small plant
initially and to consider expanding it to a larger facility three years later if the market has proven favorable.

Marketing has provided the following probability estimates for a ten-year plan:

First 3-Year Demand Next 7-Year Demand Probability

Unfavorable Unfavorable .2
Unfavorable Favorable .0
Favorable Favorable .7

Cengage Learning Testing, Powered by Cognero Page 27

Chapter 13 - Decision Analysis
Favorable Unfavorable .1

If the small plant is expanded, the probability of demands over the remaining seven years is 7/8 for favorable and 1/8 for
unfavorable.  The accounting department has provided the payoff for each outcome:

Demand Facility Plan Payoff

Favorable, favorable 1 $5,000,000
Favorable, unfavorable 1 2,500,000
Unfavorable, unfavorable 1 1,000,000
Favorable, favorable 2--expanded 4,000,000
Favorable, unfavorable 2--expanded 100,000
Favorable, favorable 2--not expanded 1,500,000
Favorable, unfavorable 2--not expanded 500,000
Unfavorable, unfavorable 2--not expanded    300,000

With these estimates, analyze Sunshine's facility decision and:

a.   Perform a complete decision tree analysis.

b.   Recommend a strategy to Sunshine.
c.   Determine what payoffs will result from your recommendation.
ANSWER:
a.
 

 b.  Recommended strategy:  Build the large plant

c.  Possible payoffs that will result:  $5,000,000; $2,500,000; or $1,000,000
POINTS: 1
TOPICS: Expected value and decision trees

Cengage Learning Testing, Powered by Cognero Page 28

Chapter 13 - Decision Analysis
91. 
A Pacific Northwest lumber company is considering the expansion of one of its mills. The question is whether to do it
now, or wait for one year and re-consider. If they expand now, the major factors of importance are the state of the
economy and the level of interest rates. The combination of these two factors results in five possible situations. If they do
not expand now, only the state of the economy is important and three conditions characterize the possibilities. The
following table summarizes the situation:

Probabilities Revenues
Expand
very favorable .2  $80,000
favorable .2  $60,000
neutral .1  $20,000
unfavorable .3 -$20,000
very unfavorable .2 -$30,000
Don't expand
expansion .2 $50,000
steady .5 $30,000
contraction .3 $10,000

a.   Draw the decision tree for this problem.

b.   What is the expected value for expanding?
c.   What is the expected value for not expanding?
d.   Based on expected value, what should the company’s decision(s) be?
ANSWER:
a.

 
b.   EV(Expanding) = 2(80,000) + .2(60,000) + .1(20,000)
                                                        + .3(-20,000) + .2(-30,000) = $18,000
c.   EV(Not Expanding) = 2(50,000) + .5(30,000) + .3(10,000) = $28,000
d.   Do not expand
POINTS: 1
TOPICS: Expected value and decision trees

92. 

Cengage Learning Testing, Powered by Cognero Page 29

Chapter 13 - Decision Analysis
For the payoff table below, the decision maker will use P(s1) = .15, P(s2) = .5, and P(s3) = .35.

State of Nature
Decision s1 s2 s3
d1    -5000   1000 10,000
d2 -15,000 -2000 40,000

a. What alternative would be chosen according to expected value?

b. For a lottery having a payoff of 40,000 with probability p and -15,000 with probability (1 - p),
the decision maker expressed the following indifference probabilities.

Payoff Probability
10,000 .85
1000 .60
-2000 .53
-5000 .50

Let U(40,000) = 10 and U(-15,000) = 0 and find the utility value for each payoff.
c. What alternative would be chosen according to expected utility?

ANSWER:
a. EV(d1) = 3250 and EV(d2) = 10750, so choose d2.
b. Payoff Probability Utility
10,000 .85 8.5
1000 .60 6.0
-2000 .53 5.3
-5000 .50 5.0

c. EU(d1) = 6.725 and EU(d2) = 6.15, so choose d1.

POINTS: 1
TOPICS: Expected utility approach

93. 
A decision maker who is considered to be a risk taker is faced with this set of probabilities and payoffs

State of Nature
Decision s1 s2 s3
d1    5   10  20
d2 -25  0 50
d3 -50 -10 80
Probability .30  .35 .35

For the lottery p(80) + (1 - p)(-50), this decision maker has assessed the following indifference probabilities

Payoff Probability
50 .60
20 .35
10 .25
5 .22
Cengage Learning Testing, Powered by Cognero Page 30
Chapter 13 - Decision Analysis
0 .20
-10 .18
-25 .10

Rank the decision alternatives on the basis of expected value and on the basis of expected utility.
ANSWER:
EV(d1) = 12 EV(d2) = 10 EV(d3) = 9.5
EU(d1) = 2.76 EU(d3) = 3.1 EU(d3) = 4.13

POINTS: 1
TOPICS: Expected utility approach

94. Three decision makers have assessed utilities for the problem whose payoff table appears below.

State of Nature
Decision s1 s2 s3
d1 500 100 -400
d2 200 150 100
d3 -100 200 300
Probability .2 .6 .2

Indifference Probability for Person

Payoff A B C
300 .95 .68 .45
200 .94 .64 .32
150 .91 .62 .28
100 .89 .60 .22
-100 .75 .45 .10

a. Plot the utility function for each decision maker.

b. Characterize each decision maker's attitude toward risk.
c. Which decision will each person prefer?

ANSWER:
a.

Cengage Learning Testing, Powered by Cognero Page 31

Chapter 13 - Decision Analysis

  

b. Person A is a risk avoider, Person B is fairly risk neutral, and Person C is a risk avoider.
c. For person A, EU(d1) = .734 EU(d2) = .912 EU(d3) = .904
For person B, EU(d1) = .56 EU(d2) = .62 EU(d3) = .61
For person C, EU(d1) = .332 EU(d2) = .276 EU(d3) = .302
Decision 1 would be chosen by person C. Decision 2 would be chosen by persons A and B.

POINTS: 1
TOPICS: Risk avoiders versus risk takers

95. 
A decision maker has the following utility function

Payoff Indifference Probability

200 1.00
150 .95
50 .75
0 .60
-50 0

What is the risk premium for the payoff of 50?

ANSWER:
EV = .75(200) + .25(-50) = 137.50
Risk premium is 137.50 - 50 = 87.50
POINTS: 1
TOPICS: Developing utilities for monetary
payoffs

Cengage Learning Testing, Powered by Cognero Page 32

Chapter 13 - Decision Analysis
96. 
Determine decision strategies based on expected value and on expected utility for this decision tree. Use the utility
function

Payoff Indifference Probability

500 1.00
350 .89
300 .84
180 .60
100 .43
40 .20
20 .13
0 0

ANSWER:
Let U(500) = 1 and U(0) = 0. Then

After branch Expected value Expected utility

A 120 .336
J 316 .680
K 150 .522
B 127.2 .381
C 100 .430

Based on expected value, the decision strategy is to select B. If G happens, select J. Based on expected utility,
it is best to choose C.

Cengage Learning Testing, Powered by Cognero Page 33

Chapter 13 - Decision Analysis
POINTS: 1
TOPICS: Expected utility approach

97. 
Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy. The fire statistics indicate that in
a given year the probability of property damage in a fire is as follows:

Fire Damage $100,000 $75,000 $50,000 $25,000 $10,000 $0

Probability .006 .002 .004 .003 .005 .980

a. If Burger Prince was risk neutral, how much would they be willing to pay for fire insurance?
b. If Burger Prince has the utility values given below, approximately how much would they be
willing to pay for fire insurance?

Loss $100,000 $75,000 $50,000 $25,000 $10,000 $5,000 $0

Utility 0 30 60 85 95 99 100

ANSWER:
a. $1,075
b. $5,000

POINTS: 1
TOPICS: Decision making using utility

98. 
Super Cola is considering the introduction of a new 8 oz. root beer. The probability that the root beer will be a success is
believed to equal .6. The payoff table is as follows:

Success (s1) Failure (s2)

Produce $250,000 -$300,000
Do Not Produce -$50,000 -$20,000

Company management has determined the following utility values:

Amount $250,000 -$20,000 -$50,000 -$300,000

Utility 100 60 55 0

a. Is the company a risk taker, risk averse, or risk neutral?

b. What is Super Cola's optimal decision?

ANSWER:
a. Risk averse
b. Produce root beer as long as p > 60/105 = .571

POINTS: 1
TOPICS: Decision making using utility

99. 
Chez Paul is contemplating either opening another restaurant or expanding its existing location. The payoff table for these
two decisions is:
Cengage Learning Testing, Powered by Cognero Page 34
Chapter 13 - Decision Analysis

State of Nature
Decision s1 s2 s3
New Restaurant -$80,000 $20,000 $160,000
Expand -$40,000 $20,000 $100,000

Paul has calculated the indifference probability for the lottery having a payoff of $160,000 with probability p and -
$80,000 with probability (1-p) as follows:

Amount Indifference Probability (p)

-$40,000 .4
$20,000 .7
$100,000 .9

a. Is Paul a risk avoider, a risk taker, or risk neutral?

b. Suppose Paul has defined the utility of -$80,000 to be 0 and the utility of $160,000 to be 80.
What would be the utility values for -$40,000, $20,000, and $100,000 based on the
indifference probabilities?
c. Suppose P(s1) = .4, P(s2) = .3, and P(s3) = .3. Which decision should Paul make? Compare
with the decision using the expected value approach.

ANSWER:
a. A risk avoider
b. Amount Utility
-$40,000 32
$20,000 56
$100,000 72

c. Decision is d2; EV criterion decision would be d1

POINTS: 1
TOPICS: Decision making using utility

100. 
The Dollar Department Store chain has the opportunity of acquiring either 3, 5, or 10 leases from the bankrupt Granite
Variety Store chain. Dollar estimates the profit potential of the leases depends on the state of the economy over the next
five years. There are four possible states of the economy as modeled by Dollar Department Stores and its president
estimates P(s1) = .4, P(s2) = .3, P(s3) = .1, and P(s4) = .2. The utility has also been estimated. Given the payoffs (in
$1,000,000's) and utility values below, which decision should Dollar make?

Payoff Table State Of The Economy

Over The Next 5 Years
Decision s1 s2 s3 s4
d1 -- buy 10 leases 10 5  0 -20
d2 -- buy 5 leases  5 0 -1 -10
d3 -- buy 3 leases  2 1 0 -1
d4 -- do not buy  0 0 0 0

Utility Table

Cengage Learning Testing, Powered by Cognero Page 35

Chapter 13 - Decision Analysis
Payoff (in $1,000,000's) +10 +5 +2 0 -1 -10 -20
Utility +10 +5 +2 0 -1 -20 -50

ANSWER:
Buy 3 leases
POINTS: 1
TOPICS: Decision making using utility

101. 
Consider the following problem with four states of nature, three decision alternatives, and the following payoff table (in
$'s):

The indifference probabilities for three individuals are:

Payoff Person 1 Person 2 Person 3

$ 2600 1.00 1.00 1.00
$ 400 .40 .45 .55
$ 200 .35 .40 .50
$0 .30 .35 .45
-$ 200 .25 .30 .40
-$1400 0 0 0

a.  Classify each person as a risk avoider, risk taker, or risk neutral.
b.   For the payoff of $400, what is the premium the risk avoider will pay to avoid risk?  What is the premium the risk
taker will pay to have the opportunity of the high payoff?
c.   Suppose each state is equally likely.  What are the optimal decisions for each of these three people?
s1 s2 s3 s4
d1 200 2600 -1400 200
d2 0 200 - 200 200
d3 -200 400 0 200
ANSWER:
a.   Person 1 -- risk taker; Person 2 -- risk neutral; Person 3 -- risk
avoider
b.   Risk avoider would pay $400; Risk taker would pay $200
c.   Person 1 -- d1;   Person 2 -- d1;   Person 3 -- d1
POINTS: 1
TOPICS: Risk avoiders and risk takers

102. 
Metropolitan Cablevision has the choice of using one of three DVR systems.  Profits are believed to be a function of
customer acceptance.  The payoff to Metropolitan for the three systems is:

System
Acceptance Level I II III
High $150,000 $200,000 $200,000
Medium $  80,000 $  20,000 $  80,000
Low $  20,000 -$ 50,000 -$100,000

The probabilities of customer acceptance for each system are:

Cengage Learning Testing, Powered by Cognero Page 36
Chapter 13 - Decision Analysis

System
Acceptance Level I II III
High .4 .3 .3
Medium .3 .4 .5
Low .3 .3 .2

The first vice president believes that the indifference probabilities for Metropolitan should be:

Amount Probability
$150,000 .90
$ 80,000 .70
$ 20,000 .50
-$ 50,000 .25

 The second vice president believes Metropolitan should assign the following utility values:

Amount Utility
$200,000 125
$150,000 95
$ 80,000 55
$ 20,000 30
-$ 50,000 10
-$100,000 0

a.  Which vice president is a risk taker?  Which one is risk averse?
b.  Which system will each vice president recommend?
c.  What system would a risk neutral vice president recommend?
ANSWER:
a.  Risk Taker -- Second Vice President
     Risk Avoider -- First Vice President
b.  First Vice President --  System I
     Second Vice President -- System III
c.  Risk Neutral Vice President -- System I
POINTS: 1
TOPICS: Risk avoiders and risk takers

Essay

103. When and why should a utility approach be followed?

ANSWER: Answer not provided.
POINTS: 1
TOPICS: Expected value versus
utility

104. Give two examples of situations where you have decided on a course of action that did not have the highest expected
monetary value.
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Expected value versus

Cengage Learning Testing, Powered by Cognero Page 37

Chapter 13 - Decision Analysis
utility

105. Explain how utility could be used in a decision where performance is not measured by monetary value.
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Expected value versus expected utility

106. Explain the relationship between expected utility, probability, payoff, and utility.
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Expected value versus expected utility

107. Draw the utility curves for three types of decision makers, label carefully, and explain the concepts of increasing and
decreasing marginal returns for money.
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Risk avoiders versus risk takers

108. Explain why the decision maker might feel uncomfortable with the expected value approach, and decide to use a
non-probabilistic approach even when probabilities are available.
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Decision making with probabilities

109. Why perform sensitivity analysis? Of what use is sensitivity analysis where good probability estimates are difficult to
obtain?
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Sensitivity analysis

110. How can a good decision maker "improve" luck?

ANSWER: Answer not provided.
POINTS: 1
TOPICS: Introduction

111. Use a diagram to compare EVwPI, EVwoPI, EVPI, EVwSI, EVwoSI, and EVSI.
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Expected value of sample information

112. Show how you would design a spreadsheet to calculate revised probabilities for two states of nature and two
indicators.
ANSWER: Answer not provided.
POINTS: 1
TOPICS: Decision analysis and spreadsheets

Cengage Learning Testing, Powered by Cognero Page 38