Chapter 09 – Decision Analysis
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True / False Questions
1. States of nature are alternatives available to a decision maker.
2. In decision analysis, states of nature refer to possible future conditions.
3. Prior probabilities refer to the relative likelihood of possible states of nature.
4. Payoffs always represent profits in decision analysis problems.
5. A decision tree branches out all of the possible decisions and all of the possible events.
6. An advantage of payoff tables compared to decision trees is that they permit us to analyze
situations involving sequential decisions.
7. Payoff tables may include only non-negative numbers.
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53. If he uses the maximum likelihood criterion, which size bus will he decide to purchase?
54. If he uses Bayes’ decision rule, which size bus will he decide to purchase?
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55. What is the expected annual profit for the bus that he will decide to purchase using Bayes’
decision rule?
56. What is his expected value of perfect information?
The construction manager for ABC Construction 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:
Chapter 09 – Decision Analysis
The head of operations for a movie studio wants to determine which of two new scripts they
should select for their next major production. She feels that script #1 has a 70% chance of
earning $100 million over the long run, but a 30% chance of losing $20 million. If this movie
is successful, then a sequel could also be produced, with an 80% chance of earning $50
million, but a 20% chance of losing $10 million. On the other hand, she feels that script #2
has a 60 % chance of earning $120 million, but a 40% chance of losing $30 million. If
successful, its sequel would have a 50% chance of earning $80 million and a 50% chance of
losing $40 million. As with the first script, if the original movie is a “flop”, then no sequel
would be produced.
61. What would be the total payoff is script #1 were a success, but its sequel were not?
62. What is the probability that script #1 will be a success, but its sequel will not?
63. What is the expected payoff from selecting script #1?
Chapter 09 – Decision Analysis
There is an option of paying $100 to have research done to better predict which state of nature
will occur. When the true state of nature is S1, the research will accurately predict S1 60% of
the time. When the true state of nature is S2, the research will accurately predict S2 80% of
the time.
71. Given that the research is not done, what is the expected payoff using Bayes’ decision
rule?
72. What is the expected value of perfect information?
73. Given that the research is done, what is the joint probability that the state of nature is S1
and the research predicts S1?
