7) The site selection team you formed last quarter meets with you in the conference room to present the
results of their thoughtful analysis. They have collectively logged 200,000 frequent flyer miles while
conducting their investigation. The conference room table sags under the weight of their massive report
and all team members sport deep tans. As the leader drones on about their completely objective approach
to the problem he projects a slide containing the following information about their location of choice.
What questions do you, a conscientious vice-president level executive, have for the team about this
portion of their analysis?
8) A company is screening ideas for new services. Four alternative service ideas are being considered.
Management identified four criteria and weighted them as follows: A = 40, B = 30, C = 20, and D = 10. They
have also come up with scored values for the five alternatives and the four criteria as shown below.
Management has decided that if an alternative has less than a total scored value of 600, it should
automatically be rejected. Use the preference matrix technique to determine which idea should be accepted.
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Copyright © 2019 Pearson Education, Inc.
A.3 Decision Theory
1) A payoff table shows the amount for each alternative if each possible event occurs.
2) If the payoff table contains expenses instead of revenues, then the best alternative is the lowest payoff.
3) If a new alternative is added to a payoff table and the maximax criterion is applied again, the new
decision must either remain with the original maximax alternative or the new alternative.
4) The Laplace criterion will reach the same decision as the Minimax Regret criterion when the payoff
table contains expenses instead of revenues.
5) Maximax is a decision rule for the pessimist.
6) By definition, the maximax and maximin criteria cannot result in the selection of a common alternative
in decision making under uncertainty.
7) Making a decision under risk using the expected value criterion is the equivalent of using the Laplace
decision rule under uncertainty.
8) Choosing the alternative that is the “best of the worst” using decision making under uncertainty would
be:
A) maximin.
B) maximax.
C) Laplace.
D) minimax regret.
9) Choosing the alternative that is the best weighted payoff using decision making under uncertainty
would be:
A) maximin.
B) maximax.
C) Laplace.
D) minimax regret.
10) Choosing the alternative that minimizes lost-opportunity costs using decision making under
uncertainty would be:
A) maximin.
B) maximax.
C) Laplace.
D) minimax regret.
11) The decision rule in decision making under uncertainty that would be best for the manager who has
high expectations would be:
A) maximin.
B) maximax.
C) Laplace.
D) minimax regret.
12) The decision rule in decision making under uncertainty that is most appropriate for the pessimistic
manager would be:
A) maximin.
B) maximax.
C) Laplace.
D) minimax regret.
Table A.1
Use the following to answer the questions below.
A couple planning a vacation needs to choose between four different modes of transportation as shown
in the table. Depending on the weather, either excellent, normal, or bad, they have estimated their daily
comfort expenses.
Excellent
Weather
Normal
Weather
Bad Weather
Plane
$70
$51
$38
Train
$22
$46
$90
Automobile
$9
$14
$52
Boat
$44
$35
$24
13) Which alternative in Table A.1 performs best under the minimax regret criterion?
A) Plane
B) Train
C) Automobile
D) Boat
14) An optimistic couple would opt for a(n) ________ based on the information presented in Table A.1.
A) plane
B) train
C) automobile
D) boat
Table A.2
Use the following to answer the questions below.
A company that is introducing a new product has to choose between four different manufacturing
methods, referred to as methods A, B, C and D. Depending on the demand for the product, they forecast
different levels of expenses for the year (values are in thousands). The company has identified three
possible states of nature for economic growth, and named them High, Medium, and Low.
High
Medium
Low
Method A
$450
$670
$780
Method B
$950
$320
$200
Method C
$375
$575
$775
Method D
$800
$400
$300
15) Using the information in Table A.2, which alternative is best in accordance with an optimistic outlook?
A) A
B) B
C) C
D) D
16) Using the information in Table A.2, which alternative is best in accordance with a pessimistic outlook?
A) A
B) B
C) C
D) D
17) Using the information in Table A.2, which alternative is best in accordance with a decision criterion of
Laplace?
A) A
B) B
C) C
D) D
18) Using the information in Table A.2, which alternative is best in accordance with a decision criterion of
minimax regret?
A) A
B) B
C) C
D) D
19) Using the information in Table A.2, which alternative is best if further study revealed that the
probability of high growth is 0.2, the probability of medium growth is 0.5, and the probability of low
growth is 0.3?
A) A
B) B
C) C
D) D
Use the following to answer the questions below.
In choosing between three new jobs, Joe MBA considers the potential payoffs over the next three years.
The following table contains the payoffs, given the speed of promotion in each of the organizations. The
probability of fast promotion is 0.6, and the probability of slow promotion is 0.4.
Slow Promotion
Fast Promotion
($180,000)
$600,000
$200,000
$400,000
$250,000
$260,000
20) Use the information in Table A.3. Which alternative is best, given the matrix payoff?
A) The A alternative would be chosen using the maximin decision rule.
B) The B alternative would be chosen using the maximax decision rule.
C) The C alternative would be chosen using the Laplace decision rule.
D) The C alternative would be chosen using the maximin decision rule.
21) Use the information in Table A.3 and the Laplace decision rule. The weighted payoff is:
A) less than $200,000 if the high-flying consultant job is selected.
B) more than $280,000 if the research assistant job is selected.
C) more than $280,000 if the utility analyst job is selected.
D) highest for the research assistant position.
22) Use the information in Table A.3 and the minimax regret decision rule. The maximum regret is:
A) less than $300,000 if the high-flying consultant job is selected.
B) less than $300,000 if the utility analyst job is selected.
C) less than $300,000 if the research assistant job is selected.
D) lowest for the research assistant job.
23) Use the information in Table A.3 and the expected-value rule. Which statement is true?
A) The expected value of the consultant job is more than $300,000.
B) The expected value of the utility analyst job is more than $300,000.
C) The expected value of the research assistant job is less than $250,000.
D) The job with the highest expected value is the research assistant.
24) In decision theory, the different courses of action that a decision maker can choose are called
________.
25) A(n) ________ shows the amount of revenue or expenses for each alternative if each possible event
occurs.
26) The decision rule ________ is also referred to as the pessimist’s criterion.
27) The decision rule ________ is also referred to as the optimist’s criterion.
28) The decision rule ________ chooses the alternative that is the “best of the best.”
29) An analyst that can’t assign probabilities to the events must be engaged in decision-making under
________.
30) The decision rule ________ chooses the alternative with the best weighted payoff.
31) A(n) ________ is the difference between a given payoff and the best payoff for a given state of nature.
32) List and describe decision rules that are used for decision making under uncertainty.
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33) Provide an example of two or more events where you as a decision maker would truly be engaged in
decision making under uncertainty. Why are you incapable of deciding which event is more likely than
the other(s)?
34) Given a payoff table in a decision making under risk scenario, what value is derived from applying
the following decision rule? Apply all four criteria presented in your book and choose the alternative that
is selected more frequently than the others.
Answer: The decision rules include maximin, maximax, Laplace, and minimax regret. Maximin chooses
the “best of the worst” and is for the pessimist. Maximax chooses the “best of the best” and is for the
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35) A company that is introducing a new product has to choose between four marketing plans, A through
D. The marketing plans are forecasted to have varying payoffs, depending on the level of advertising. The
probability of high demand is 0.6 and of low demand 0.4. Use the following decision rules to select the
marketing plan: maximin, maximax, minimax regret, Laplace, and expected value.
Answer:
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