True / False Questions: Chapter 05S Supplement: Decision Theory

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
making health care decisions since every person is unique.
FALSE
AACSB: RT
Difficulty: Easy
TLO: 1
Taxonomy: Synthesis

2. Bounded rationality refers to the limits imposed on decision-making because of costs,

human abilities, time, technology, and/or availability of information.
TRUE
Difficulty: Easy
TLO: 1
Taxonomy: Knowledge

3. In reaching a decision, the alternative with the lowest cost should be ranked #1.
FALSE
Difficulty: Medium
TLO: 1
Taxonomy: Knowledge

5-1
4. The expected monetary value approach is most appropriate when the decision-maker is
risk-neutral.
TRUE
Difficulty: Medium
TLO: 3
Taxonomy: Knowledge

5. The value of perfect information is inversely related to losses predicted.

FALSE
Difficulty: Hard
TLO: 5
Taxonomy: Knowledge

6. Expected monetary value gives the long-run average payoff if a large number of identical
decisions could be made.
TRUE
Difficulty: Medium
TLO: 3
Taxonomy: Knowledge

7. Among decision environments, risk implies that certain parameters have probabilistic
outcomes.
TRUE
Difficulty: Medium
TLO: 1
Taxonomy: Knowledge

5-2
8. Among decision environments, uncertainty implies that states of nature have wide ranging
probabilities associated with them.
FALSE
Difficulty: Medium
TLO: 1
Taxonomy: Knowledge

9. In decision theory, states of nature refer to possible future conditions.

TRUE
Difficulty: Easy
TLO: 1
Taxonomy: Knowledge

10. The maximin approach involves choosing the alternative with the highest payoff.
FALSE
Difficulty: Hard
TLO: 2
Taxonomy: Knowledge

11. The maximin approach involves choosing the alternative that has the "best worst" payoff.
TRUE
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

12. The Laplace criterion treats states of nature as being equally likely.

TRUE
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

5-3
13. The maximax approach is a pessimistic strategy.

FALSE
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

14. A weakness of the maximin approach is that it loses some information.

TRUE
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

15. The expected value approach applies to decision-making under uncertainty.

FALSE
Difficulty: Medium
TLO: 3
Taxonomy: Knowledge

16. The expected value approach is used for decision-making under risk.

TRUE
Difficulty: Easy
TLO: 3
Taxonomy: Knowledge

17. The EVPI indicates an upper limit on the amount a decision-maker should be willing to
spend to obtain additional information.
TRUE
AACSB: RT
Difficulty: Hard
TLO: 3
Taxonomy: Synthesis

5-4
18. Graphical sensitivity analysis is limited to cases with no more than two alternatives.
FALSE
Difficulty: Hard
TLO: 6
Taxonomy: Knowledge

19. Graphical sensitivity analysis is used for decision-making under risk.

TRUE
Difficulty: Medium
TLO: 6
Taxonomy: Knowledge

20. An advantage of decision trees compared to payoff tables is that they permit us to analyze
situations involving sequential decisions.
TRUE
Difficulty: Medium
TLO: 4
Taxonomy: Knowledge

Multiple Choice Questions

21. The term sub-optimization is best described as the:

A. result of individual departments making the best decisions for their own areas
B. limitations on decision-making caused by costs and time
C. result of failure to adhere to the steps in the decision process
D. result of ignoring symptoms of the problem
E. none of the above
Difficulty: Medium
TLO: 1
Taxonomy: Knowledge

5-5
22. Which phrase best describes the term bounded rationality?

A. thinking a problem through clearly before acting
B. taking care not to exhaust limited resources
C. the result of departmentalized decision making
D. limits imposed on decision making by costs, time, and technology
E. the use of extremely structured steps in the decision making process
Difficulty: Hard
TLO: 1
Taxonomy: Knowledge

23. Testing how a problem solution reacts to changes in one or more of the model parameters
is called:
A. simulation
B. sensitivity analysis
C. priority recognition
D. analysis of variance
E. decision analysis
Difficulty: Hard
TLO: 6
Taxonomy: Knowledge

24. Sensitivity analysis is required because ________.

A. payoffs and probabilities are estimates
B. most decision will affect employees
C. expected payoffs are sensitive to the time value of money
D. it's the second step in the decision model
E. with the passage of time, small decisions get bigger
AACSB: RT
Difficulty: Medium
TLO: 6
Taxonomy: Knowledge

5-6
25. A tabular presentation that shows the outcome for each decision alternative under the
various possible states of nature is called a/an:
A. payoff table
B. feasible region
C. LaPlace table
D. decision tree
E. payback period matrix
Difficulty: Medium
TLO: 1
Taxonomy: Knowledge

26. Which of the following characterizes decision-making under uncertainty?

A. Decision-makers must rely on probabilities in assessing outcomes.
B. The likelihood of possible future events is unknown.
C. Relevant parameters have known values.
D. Certain parameters have probabilistic outcomes.
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

27. Which of the following is not an approach for decision-making under uncertainty?

A. decision trees
B. maximin
C. maximax
D. minimax regret
E. Laplace
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

5-7
28. Determining the worst payoff for each alternative and choosing the alternative with the
"best worst" is the approach called:
A. minimin
B. maximin
C. maximax
D. minimax regret
E. Laplace
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

29. Determining the average payoff for each alternative and choosing the alternative with the
highest average is the approach called:
A. minimin
B. maximin
C. maximax
D. minimax regret
E. Laplace
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

30. The maximin approach to decision-making refers to:

A. minimizing the maximum return
B. maximizing the minimum return
C. maximizing the minimum expected value
D. choosing the alternative with the highest payoff
E. choosing the alternative with the minimum payoff
Difficulty: Medium
TLO: 2
Taxonomy: Knowledge

5-8
31. Which one of these is not used in decision-making under risk?

A. EVPI
B. EMV
C. decision trees
D. minimax regret
E. All are used for risk situations.
Difficulty: Hard
TLO: 3
Taxonomy: Knowledge

32. The term opportunity loss or regret is most closely associated with:

A. minimax regret
B. maximax
C. maximin
D. expected monetary value
E. Laplace
Difficulty: Hard
TLO: 2
Taxonomy: Knowledge

33. The expected monetary value criterion (EMV) is the decision-making approach used with
the decision environment of:
A. certainty
B. risk
C. uncertainty
D. all of the above
Difficulty: Medium
TLO: 3
Taxonomy: Knowledge

5-9
34. A decision tree is:

A. an algebraic representation of alternatives
B. a behavioral representation of alternatives
C. a matrix representation of alternatives
D. a schematic representation of alternatives
E. limited to a maximum of 12 branches
Difficulty: Medium
TLO: 4
Taxonomy: Knowledge

35. The difference between expected payoff under certainty and expected payoff under risk is
the expected:
A. monetary value
B. value of perfect information
C. net present value
D. rate of return
E. profit
AACSB: AS
Difficulty: Hard
TLO: 5
Taxonomy: Application

36. If the minimum expected regret is computed, it indicates to a decision-maker the

expected:
A. value of perfect information
B. payoff under certainty
C. monetary value
D. payoff under risk
AACSB: AS
Difficulty: Medium
TLO: 5

5-10
37. The term sensitivity analysis is most closely associated with:

A. maximax
B. maximin
C. decision-making under risk
D. minimax regret
E. Laplace criterion
Difficulty: Hard
TLO: 6
Taxonomy: Knowledge

Essay Questions

5-11
38. A manager has developed the following payoff table that indicates the profits associated
with a set of alternatives under two possible states of nature.
Answer the following questions:

(A) If the manager uses maximin as the decision criterion, which of the alternatives would be
indicated?
(B) If the manager uses minimax regret as the criterion, which alternative would be indicated?
(C) Determine the expected value of perfect information if P(S2) = .40.
(D) Determine the range of P(S2) for which each alternative would be optimal.
5-12
(A) Maximin: Alt. 3

(B) Regret matrix is:
*minimum regret
5-13
5-14
Therefore, Alternative 1 or 3 would be selected under risk, within EVPI of 2.4 (Min EVPI =
Max EMV).
AACSB: AS
Difficulty: Medium
TLO: 2, 3, 6

39. A manager's staff has compiled the information below which pertains to four capacity
alternatives under four states of nature. Values in the matrix are present value in thousands of
dollars.
(A) Assuming a maximax strategy, which alternative would be chosen?

(B) If maximin were used, which alternative would be chosen?
(C) If states of nature are equally likely and an expected value criterion of maximization is
used, which alternative would be chosen?
(A) Maximax is A ($50 is the largest value for any alternative).

(B) Maximin is either B or C (Both have the largest minimum values of $30).
(C) A: $35; B: $33.75; C: $31.25; D: $27.50. Hence, choose A.
AACSB: AS
Difficulty: Medium
TLO: 2, 3

5-15
40. A manager has learned that annual profits from four alternatives being considered for
solving a capacity problem are projected to be $15,000 for A, $30,000 for B, $45,000 for C,
and $60,000 for D if state of nature 1 occurs; and $60,000 for A, $80,000 for B, $90,000 for
C, and $35,000 for D if state of nature 2 occurs.
(A) Assuming maximax is used, what alternative would be chosen?
(B) Assuming maximin is used, what alternative would be chosen?
(C) If P(State of Nature 1) is .40, what alternative has the highest expected monetary value?
(D) Determine the range of P(S2) for which each alternative would be optimal.
(A) Maximax is C ($90)

(B) Maximin is C ($45)
(C) Max EMV is C ($72)
(D) Refer to the diagram, above.
5-16
AACSB: AS
Difficulty: Medium
TLO: 2, 3, 6

41. A manager is quite concerned about the recent deterioration of a section of the roof on a
building that houses her firm's computer operations. According to her assistant there are three
options which merit consideration: A, B, and C. Moreover, there are three possible future
conditions that must be included in the analysis: I, which has a probability of occurrence of .5;
II, which has a probability of .3; and III, which has a probability of .2.
If condition I materializes, A will cost $12,000, B will cost $20,000, and C will cost $16,000.
If condition II materializes, the costs will be $15,000 for A, $18,000 for B, and $14,000 for C.
If condition III materializes, the costs will be $10,000 for A, $15,000 for B, and $19,000 for
C.
(A) Draw a decision tree for this problem.
(B) Using expected monetary value, which alternative should be chosen?
Alternative A (expected monetary value = $12.5K) should be chosen.
AACSB: AS
Difficulty: Medium
TLO: 3, 4

Multiple Choice Questions

5-17
*PV for profits ($000)
42. The maximax strategy would be:

A. buy
B. lease
C. rent
D. high
E. low
AACSB: AS
Difficulty: Medium
TLO: 2

43. The maximin strategy would be:

A. buy
B. lease
C. rent
D. high
E. low
AACSB: AS
Difficulty: Medium
TLO: 2

5-18
44. The minimax regret strategy would be:

A. buy
B. lease
C. rent
D. high
E. low
AACSB: AS
Difficulty: Medium
TLO: 2

45. If P(high) is .60, the choice for maximum expected value would be:
A. buy
B. lease
C. rent
D. high
E. low
AACSB: AS
Difficulty: Medium
TLO: 3

5-19

A. small
B. medium
C. med.-large
D. large
E. ex-large
AACSB: AS
Difficulty: Medium
TLO: 2


A. small
B. medium
C. med.-large
D. large
E. ex-large
AACSB: AS
Difficulty: Medium
TLO: 2


A. small
B. medium
C. med.-large
D. large
E. ex-large
AACSB: AS
Difficulty: Medium
TLO: 2

5-20
49. If yes and no are equally likely, which alternative has the largest expected monetary
value?
A. small
B. medium
C. med.-large
D. large
E. ex-large
AACSB: AS
Difficulty: Medium
TLO: 3


A. A
B. B
C. C
D. D
E. E
AACSB: AS
Difficulty: Medium
TLO: 2

5-21

A. A
B. B
C. C
D. D
E. E
AACSB: AS
Difficulty: Medium
TLO: 2


A. A
B. B
C. C
D. D
E. E
AACSB: AS
Difficulty: Medium
TLO: 2

53. With equally likely states of nature, the alternative that has the largest expected monetary
value is:
A. A
B. B
C. C
D. D
E. E
AACSB: AS
Difficulty: Medium
TLO: 3

5-22
The new owner of a beauty shop is trying to decide whether to hire one, two, or three
beauticians. She estimates that profits next year (in thousands of dollars) will vary with
demand for her services and has estimated demand in three categories low, medium and high
54. If she uses the maximax criterion, how many beauticians will she decide to hire?
A. one
B. two
C. three
D. either one or two
E. either two or three
AACSB: AS
Difficulty: Medium
TLO: 2

55. If she uses the Laplace criterion, how many beauticians will she decide to hire?
A. one
B. two
C. three
AACSB: AS
Difficulty: Medium
TLO: 2

5-23
56. If she uses the minimax regret criterion, how many beauticians will she decide to hire?
A. one
B. two
C. three
AACSB: AS
Difficulty: Medium
TLO: 2

57. If she feels the chances of low, medium, and high demand are 50%, 20%, and 30%
respectively, what are the expected annual profits for the number of beauticians she will
decide to hire?
A. $54,000
B. $55,000
C. $70,000
D. $80,000
E. $135,000
AACSB: AS
Difficulty: Medium
TLO: 3

58. If she feels the chances of low, medium, and high demand are 50%, 20%, and 30%
respectively, what is her expected value of perfect information?
A. $54,000
B. $55,000
C. $70,000
D. $80,000
E. $135,000
AACSB: AS
Difficulty: Medium
TLO: 3

5-24
The operations manager for a local bus company wants to decide whether he should purchase
a small, medium, or large new bus for his company. He estimates that the annual profits (in
$000) will vary depending upon whether passenger demand is low, moderate, or high, as
follows:
59. If he uses the maximin criterion, which size bus will he decide to purchase?
A. small
B. medium
C. large
D. either small or medium
E. either medium or large
AACSB: AS
Difficulty: Medium
TLO: 2

60. If he uses the Laplace criterion, which size bus will he decide to purchase?
A. small
B. medium
C. large
AACSB: AS
Difficulty: Medium
TLO: 2

5-25
61. If he uses the minimax regret criterion, which size bus will he decide to purchase?
A. small
B. medium
C. large
AACSB: AS
Difficulty: Medium
TLO: 2

62. If he feels the chances of low, moderate, and high demand are 30%, 30%, and 40%
respectively, what is the expected annual profit for the bus that he will decide to purchase?
A. $15,000
B. $61,000
C. $69,000
D. $72,000
E. $87,000
AACSB: AS
Difficulty: Medium
TLO: 3

63. If he feels the chances of low, moderate, and high demand are 30%, 30%, and 40%
respectively, what is his expected value of perfect information?
A. $15,000
B. $61,000
C. $69,000
D. $72,000
E. $87,000
AACSB: AS
Difficulty: Medium
TLO: 5

5-26
The operations manager for a well-drilling company must recommend whether to build a new
facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000)
will vary with the amount of precipitation (rainfall) as follows:
64. If he uses the maximax criterion, which alternative will he decide to select?
A. do nothing
B. expand
C. build new
D. either do nothing or expand
E. either expand or build new
AACSB: AS
Difficulty: Medium
TLO: 2

65. If he uses the Laplace criterion, which alternative will he decide to select?
A. do nothing
B. expand
C. build new
AACSB: AS
Difficulty: Medium
TLO: 2

5-27
66. If he uses the minimax regret criterion, which alternative will he decide to select?
A. do nothing
B. expand
C. build new
AACSB: AS
Difficulty: Medium
TLO: 2

67. If he feels the chances of low, normal, and high precipitation are 30%, 20%, and 50%
respectively, what are expected long-run profits for the alternative he will select?
A. $140,000
B. $170,000
C. $285,000
D. $305,000
E. $475,000
AACSB: AS
Difficulty: Medium
TLO: 3

68. If he feels the chances of low, normal, and high precipitation are 30%, 20%, and 50%
respectively, what is his expected value of perfect information?
A. $140,000
B. $170,000
C. $285,000
D. $305,000
E. $475,000
AACSB: AS
Difficulty: Medium
TLO: 5

5-28
The local operations manager for the Internal Revenue Service must decide whether to hire
one, two, or three temporary tax examiners for the upcoming tax season. She estimates that
net revenues (in thousands of dollars) will vary with how well taxpayers comply with the new
tax code just passed by Congress, as follows:
69. If she uses the maximin criterion, how many new examiners will she decide to hire?
A. one
B. two
C. three
AACSB: AS
Difficulty: Medium
TLO: 2

70. If she uses the Laplace criterion, how many new examiners will she decide to hire?
A. one
B. two
C. three
AACSB: AS
Difficulty: Medium
TLO: 2

5-29
71. If she uses the minimax regret criterion, how many new examiners will she decide to
hire?
A. one
B. two
C. three
AACSB: AS
Difficulty: Medium
TLO: 2

72. If she feels the chances of low, medium, and high compliance are 20%, 30%, and 50%
respectively, what are the expected net revenues for the number of assistants she will decide
to hire?
A. $26,000
B. $46,000
C. $48,000
D. $50,000
E. $76,000
AACSB: AS
Difficulty: Medium
TLO: 3

73. If she feels the chances of low, medium, and high compliance are 20%, 30%, and 50%
respectively, what is her expected value of perfect information?
A. $16,000
B. $26,000
C. $46,000
D. $48,000
E. $50,000
AACSB: AS
Difficulty: Medium
TLO: 5

5-30
The construction manager for Acme Construction, Inc. must decide whether to build single-
family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary
with the population trend as follows:
74. If he uses the maximin criterion, which kind of dwellings will he decide to build?
A. single family
B. apartments
C. condominiums
D. either single family or apartments
E. either apartments or condos
AACSB: AS
Difficulty: Medium
TLO: 2

75. If he uses the Laplace criterion, which kind of dwellings will he decide to build?
A. single family
B. apartments
C. condos
AACSB: AS
Difficulty: Medium
TLO: 2

5-31
76. If he uses the minimax regret criterion, which kind of dwellings will he decide to build?
A. single family
B. apartments
C. condos
AACSB: AS
Difficulty: Medium
TLO: 2

77. If he feels the chances of declining, stable, and growing population trends are 40%, 50%,
and 10%, respectively, which kind of houses will he decide to build?
A. single family
B. apartments
C. condos
AACSB: AS
Difficulty: Medium
TLO: 3

78. If he feels the chances of declining, stable, and growing population trends are 40%, 50%,
and 10%, respectively, what is his expected value of perfect information?
A. $187,000
B. $132,000
C. $123,000
D. $ 65,000
E. $ 55,000
AACSB: AS
Difficulty: Medium
TLO: 5

5-32
The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new
retail outlet. She estimates that monthly profits will vary with demand for her cookies as
follows:
79. If she uses the maximax criterion, what size outlet will she decide to lease?
A. small
B. medium
C. large
AACSB: AS
Difficulty: Medium
TLO: 2

80. If she uses the maximin criterion, what size outlet will she decide to lease?
A. small
B. medium
C. large
AACSB: AS
Difficulty: Medium
TLO: 2

5-33
81. If she uses the Laplace criterion, what size outlet will she decide to lease?
A. small
B. medium
C. large
AACSB: AS
Difficulty: Medium
TLO: 2

82. If she uses the minimax regret criterion, what size outlet will she decide to lease?
A. small
B. medium
C. large
AACSB: AS
Difficulty: Medium
TLO: 2

83. If she feels there is a 30% chance that demand will be high, what are the expected
monthly profits for the outlet she will decide to lease?
A. $1,600
B. $1,100
C. $1,000
D. $900
E. $500
AACSB: AS
Difficulty: Medium
TLO: 3

5-34
84. If she feels there is a 30% chance that demand will be high, what is her expected payoff
under certainty?
A. $1,600
B. $1,100
C. $1,000
D. $900
E. $500
AACSB: AS
Difficulty: Medium
TLO: 5

85. If she feels there is a 30% chance that demand will be high, what is her expected value of
perfect information?
A. $1,600
B. $1,100
C. $1,000
D. $900
E. $500
AACSB: AS
Difficulty: Medium
TLO: 5

86. For what range of probability that demand will be high, will she decide to lease the small
facility?
A. 0 - .25
B. 0 - .33
C. .25 - .5
D. .33 - 1
E. .5 - 1
AACSB: AS
Difficulty: Hard
TLO: 6

5-35
87. For what range of probability that demand will be high, will she decide to lease the
medium facility?
A. 0 - .25
B. 0 - .33
C. .25 - .5
D. .33 - 1
E. .5 - 1
AACSB: AS
Difficulty: Hard
TLO: 6

88. For what range of probability that demand will be high, will she decide to lease the large
facility?
A. 0 - .25
B. 0 - .33
C. .25 - .5
D. .33 - 1
E. .5 - 1
AACSB: AS
Difficulty: Hard
TLO: 6

The advertising manager for Roadside Restaurants, Inc. needs to decide whether to spend this
month's budget for advertising on print media, television, or a mixture of the two. She
estimates that the cost per thousand "hits" (readers or viewers) will vary depending upon the
success of the new cable television network she plans to use, as follows:
5-36
89. If she uses the maximax criterion, which advertising strategy will she use?
A. print
B. mixed
C. television
D. either print or mixed
E. either mixed or television
AACSB: AS
Difficulty: Medium
TLO: 2

90. If she uses the maximin criterion, which advertising strategy will she use?
A. print
B. mixed
C. television
AACSB: AS
Difficulty: Medium
TLO: 2

91. If she uses the Laplace criterion, which advertising strategy will she use?
A. print
B. mixed
C. television
AACSB: AS
Difficulty: Medium
TLO: 2

5-37
92. If she uses the minimax regret criterion, which advertising strategy will she use?
A. print
B. mixed
C. television
AACSB: AS
Difficulty: Medium
TLO: 2

93. If she feels that there is a 60% chance that the new cable network will be successful, what
is her expected cost (per thousand "hits") for the strategy she will select?
A. $ 3.40
B. $ 4.60
C. $ 8.00
D. $ 9.00
E. $10.00
AACSB: AS
Difficulty: Medium
TLO: 3

is her expected cost (per thousand "hits") under certainty?
A. $ 3.40
B. $ 4.60
C. $ 8.00
D. $ 9.00
E. $10.00
AACSB: AS
Difficulty: Medium
TLO: 5

5-38
is her expected value (per thousand "hits") of perfect information?
A. $ 3.40
B. $ 4.60
C. $ 8.00
D. $ 9.00
E. $10.00
AACSB: AS
Difficulty: Medium
TLO: 5

96. For what range of probability that the new cable network will be successful will she select
the print media strategy?
A. 0 - .4
B. 0 - .55
C. .4 - .7
D. .55 - 1
E. .7 - 1
AACSB: AS
Difficulty: Hard
TLO: 6

the mixed media strategy?
A. 0 - .4
B. 0 - .55
C. .4 - .7
D. .55 - 1
E. .7 - 1
AACSB: AS
Difficulty: Hard
TLO: 6

5-39
the television media strategy?
A. 0 - .4
B. 0 - .55
C. .4 - .7
D. .55 - 1
E. .7 - 1
AACSB: AS
Difficulty: Hard
TLO: 6

The head of operations for a movie studio wants to determine which of two new scripts they
should select for their next major production. (Due to budgeting constraints, only one new
picture can be undertaken at this time.) She feels that script #1 has a 70 percent chance of
earning about $10,000,000 over the long run, but a 30 percent chance of losing $2,000,000. If
this movie is successful, then a sequel could also be produced, with an 80 percent chance of
earning $5,000,000, but a 20 percent chance of losing $1,000,000. On the other hand, she
feels that script #2 has a 60 percent chance of earning $12,000,000, but a 40 percent chance of
losing $3,000,000. If successful, its sequel would have a 50 percent chance of earning
$8,000,000, but a 50 percent chance of losing $4,000,000. Of course, in either case, if the
original movie were a "flop," then no sequel would be produced.
99. What would be the total payoff if script #1 were a success, but its sequel were not?
A. $15,000,000
B. $10,000,000
C. $ 9,000,000
D. $ 5,000,000
E. $-1,000,000
AACSB: AS
Difficulty: Medium
TLO: 4

5-40
100. What is the probability that script #1 will be a success, but its sequel will not?
A. .8
B. .7
C. .56
D. .2
E. .14
AACSB: AS
Difficulty: Medium
TLO: 4

101. What is the expected value of selecting script #1?

A. $15,000,000
B. $ 9,060,000
C. $ 8,400,000
D. $ 7,200,000
E. $ 6,000,000
AACSB: AS
Difficulty: Medium
TLO: 4

102. What is the expected value of selecting script #2?

A. $15,000,000
B. $ 9,060,000
C. $ 8,400,000
D. $ 7,200,000
E. $ 6,000,000
AACSB: AS
Difficulty: Medium
TLO: 4

5-41
103. What is the expected value for the optimum decision alternative?

A. $15,000,000
B. $ 9,060,000
C. $ 8,400,000
D. $ 7,200,000
E. $ 6,000,000
AACSB: AS
Difficulty: Medium
TLO: 4

One local hospital has just enough space and funds presently available to start either a cancer
or heart research lab. If administration decides on the cancer lab, there is a 20 percent chance
of getting $100,000 in outside funding from the American Cancer Society next year, and an
80 percent chance of getting nothing. If the cancer research lab is funded the first year, no
additional outside funding will be available the second year. However, if it is not funded the
first year, then management estimates the chances are 50 percent it will get $100,000 the
following year, and 50 percent that it will get nothing again. If, however, Merciless's
management decides to go with the heart lab, then there's a 50 percent chance of getting
$50,000 in outside funding from the American Heart Association the first year and a 50
percent change of getting nothing. If the heart lab is funded the first year, management
estimates a 40 percent chance of getting another $50,000 and a 60 percent chance of getting
nothing additional the second year. If it is not funded the first year, then management
estimates a 60 percent chance for getting $50,000 and a 40 percent chance for getting nothing
in the following year. For both the cancer and heart research labs, no further possible funding
is anticipated beyond the first two years.
104. What would be the total payoff if the heart lab were funded in both the first and second
years?
A. $100,000
B. $ 60,000
C. $ 50,000
D. $ 40,000
E. $ 20,000
AACSB: AS
Difficulty: Medium
TLO: 4

5-42
105. What is the probability that the heart lab will be funded in both the first and second
years?
A. .4
B. .3
C. .2
D. .1
E. 0
AACSB: AS
Difficulty: Medium
TLO: 4

106. What is the expected value for the decision alternative to select the cancer lab?
A. $100,000
B. $ 60,000
C. $ 50,000
D. $ 40,000
E. $ 20,000
AACSB: AS
Difficulty: Medium
TLO: 4

107. What is the expected value for the decision alternative to select the heart lab?
A. $100,000
B. $ 60,000
C. $ 50,000
D. $ 40,000
E. $ 20,000
AACSB: AS
Difficulty: Medium
TLO: 4

5-43

A. $100,000
B. $ 60,000
C. $ 50,000
D. $ 40,000
E. $ 20,000
AACSB: AS
Difficulty: Medium
TLO: 4

Two professors at a nearby university want to co-author a new textbook in either economics
or statistics. They feel that if they write an economics book, they have a 50 percent chance of
placing it with a major publisher, and it should ultimately sell about 40,000 copies. If they
can't get a major publisher to take it, then they feel they have an 80 percent chance of placing
it with a smaller publisher, with ultimate sales of 30,000 copies. On the other hand, if they
write a statistics book, they feel they have a 40 percent chance of placing it with a major
publisher, and it should result in ultimate sales of about 50,000 copies. If they can't get a
major publisher to take it, they feel they have a 50 percent chance of placing it with a smaller
publisher, with ultimate sales of 35,000 copies.
109. What is the probability that the economics book would wind up being placed with a
smaller publisher?
A. .8
B. .5
C. .4
D. .2
E. .1
AACSB: AS
Difficulty: Medium
TLO: 4

5-44
110. What is the probability that the statistics book would wind up being placed with a
smaller publisher?
A. .6
B. .5
C. .4
D. .3
E. 0
AACSB: AS
Difficulty: Medium
TLO: 4

111. What is the expected value for the decision alternative to write the economics book?
A. 50,000 copies
B. 40,000 copies
C. 32,000 copies
D. 30,500 copies
E. 10,500 copies
AACSB: AS
Difficulty: Medium
TLO: 4

112. What is the expected value for the decision alternative to write the statistics book?
A. 50,000 copies
B. 40,000 copies
C. 32,000 copies
D. 30,500 copies
E. 10,500 copies
AACSB: AS
Difficulty: Medium
TLO: 4

5-45

A. 50,000 copies
B. 40,000 copies
C. 32,000 copies
D. 30,500 copies
E. 10,500 copies
Difficulty: Medium
TLO: 4

Essay Questions

114. If somehow you find out for certain that state of nature #4 is going to occur, which
alternative will you select?
A=6
AACSB: AS
Difficulty: Medium
TLO: 1

5-46
115. If you are uncertain which state of nature will occur, and use the maximin criterion,
which alternative will you select?
C=2
AACSB: AS
Difficulty: Medium
TLO: 2

116. If you are uncertain which state of nature will occur, and use the maximax criterion,
which alternative will you select?
A=6
AACSB: AS
Difficulty: Medium
TLO: 2

117. If you are uncertain which state of nature will occur, and use the Laplace criterion, which
alternative will you select?
B=3
AACSB: AS
Difficulty: Medium
TLO: 2

118. If you are uncertain which state of nature will occur, and use the minimax regret
criterion, which alternative will you select?
C=3
AACSB: AS
Difficulty: Medium
TLO: 2

5-47
119. If you feel that P(#1) = .4, P(#2) = .3, P(#3) = .2, and P(#4) = .1, which alternative will
you select?
B; EV=2.9
AACSB: AS
Difficulty: Medium
TLO: 3

120. If you feel that P(#1) = .4, P(#2) = .3, P(#3) = .2, and P(#4) = .1, what is your expected
payoff under certainty?
EPC=4.1
AACSB: AS
Difficulty: Medium
TLO: 5

121. If you feel that P(#1) = .4, P(#2) = .3, P(#3) = .2, and P(#4) = .1, what is your expected
value of perfect information?
EVPI=1.2
AACSB: AS
Difficulty: Medium
TLO: 5

5-48

True / False Questions: Chapter 05S Supplement: Decision Theory

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

True / False Questions: Chapter 05S Supplement: Decision Theory

Uploaded by

Copyright:

Available Formats

Chapter 05S - Supplement: Decision Theory

True / False Questions

2. Bounded rationality refers to the limits imposed on decision-making because of costs,

5. The value of perfect information is inversely related to losses predicted.

9. In decision theory, states of nature refer to possible future conditions.

12. The Laplace criterion treats states of nature as being equally likely.

13. The maximax approach is a pessimistic strategy.

14. A weakness of the maximin approach is that it loses some information.

15. The expected value approach applies to decision-making under uncertainty.

16. The expected value approach is used for decision-making under risk.

19. Graphical sensitivity analysis is used for decision-making under risk.

Multiple Choice Questions

21. The term sub-optimization is best described as the:

22. Which phrase best describes the term bounded rationality?

24. Sensitivity analysis is required because ________.

26. Which of the following characterizes decision-making under uncertainty?

27. Which of the following is not an approach for decision-making under uncertainty?

30. The maximin approach to decision-making refers to:

31. Which one of these is not used in decision-making under risk?

32. The term opportunity loss or regret is most closely associated with:

34. A decision tree is:

36. If the minimum expected regret is computed, it indicates to a decision-maker the

37. The term sensitivity analysis is most closely associated with:

Answer the following questions:

(A) Maximin: Alt. 3

(A) Assuming a maximax strategy, which alternative would be chosen?

(A) Maximax is A ($50 is the largest value for any alternative).

(A) Maximax is C ($90)

Alternative A (expected monetary value = $12.5K) should be chosen.

Multiple Choice Questions

*PV for profits ($000)

42. The maximax strategy would be:

43. The maximin strategy would be:

44. The minimax regret strategy would be:

*PV for profits ($000)

46. The maximax strategy would be:

47. The maximin strategy would be:

48. The minimax regret strategy would be:

*PV for profits ($000)

50. The maximax strategy would be:

51. The maximin strategy would be:

52. The minimax regret strategy would be:

101. What is the expected value of selecting script #1?

102. What is the expected value of selecting script #2?

103. What is the expected value for the optimum decision alternative?

108. What is the expected value for the optimum decision alternative?

113. What is the expected value for the optimum decision alternative?

You might also like