# Chapter 20 A tabular presentation that shows the outcome for each decision

Document Type
Test Prep
Book Title
Basic Business Statistics 13th Edition
Authors
David M. Levine, Kathryn A. Szabat, Mark L. Berenson
Decision Making 20-1
ONLINE CHAPTER 20: DECISION MAKING
1. A tabular presentation that shows the outcome for each decision alternative under the various states of
nature is called:
a) a payback period matrix.
b) a decision matrix.
c) a decision tree.
d) a payoff table.
2. The difference between expected payoff under certainty and expected value of the best act without
certainty is the:
a) expected monetary value.
b) expected net present value.
c) expected value of perfect information.
d) expected rate of return.
3. A medical doctor is involved in a \$1 million malpractice suit. He can either settle out of court for
\$250,000 or go to court. If he goes to court and loses, he must pay \$825,000 plus \$175,000 in court
costs. If he wins in court the plaintiffs pay the court costs. Identify the actions of this decision-making
problem.
a) Two choices: (1) go to court and (2) settle out of court.
b) Two possibilities: (1) win the case in court and (2) lose the case in court.
c) Four consequences resulting from Go/Settle and Win/Lose combinations.
d) The amount of money paid by the doctor.
20-2 Decision Making
4. A medical doctor is involved in a \$1 million malpractice suit. He can either settle out of court for
\$250,000 or go to court. If he goes to court and loses, he must pay \$825,000 plus \$175,000 in court
costs. If he wins in court the plaintiffs pay the court costs. Identify the states of nature of this
decision-making problem.
a) Two choices: (1) go to court and (2) settle out of court.
b) Two possibilities: (1) win the case in court and (2) lose the case in court.
c) Four consequences resulting from Go/Settle and Win/Lose combinations.
d) The amount of money paid by the doctor.
5. A medical doctor is involved in a \$1 million malpractice suit. He can either settle out of court for
\$250,000 or go to court. If he goes to court and loses, he must pay \$825,000 plus \$175,000 in court
costs. If he wins in court the plaintiffs pay the court costs. Identify the outcomes of this decision-
making problem.
a) Two choices: (1) go to court and (2) settle out of court.
b) Two possibilities: (1) win the case in court and (2) lose the case in court.
c) Four consequences resulting from Go/Settle and Win/Lose combinations.
d) The amount of money paid by the doctor.
6. A company that manufactures designer jeans is contemplating whether to increase its advertising
budget by \$1 million for next year. If the expanded advertising campaign is successful, the company
expects sales to increase by \$1.6 million next year. If the advertising campaign fails, the company
expects sales to increase by only \$400,000 next year. If the advertising budget is not increased, the
company expects sales to increase by \$200,000. Identify the events in this decision-making problem.
a) Two choices: (1) increase the budget and (2) do not increase the budget.
b) Two possibilities: (1) campaign is successful and (2) campaign is not successful.
c) Four consequences resulting from the Increase/Do Not Increase and Successful/Not
Successful combinations.
d) The increase in sales dollars next year.
Decision Making 20-3
7. A company that manufactures designer jeans is contemplating whether to increase its advertising
budget by \$1 million for next year. If the expanded advertising campaign is successful, the company
expects sales to increase by \$1.6 million next year. If the advertising campaign fails, the company
expects sales to increase by only \$400,000 next year. If the advertising budget is not increased, the
company expects sales to increase by \$200,000. Identify the actions in this decision-making problem.
a) Two choices: (1) increase the budget and (2) do not increase the budget.
b) Two possibilities: (1) campaign is successful and (2) campaign is not successful.
c) Four consequences resulting from the Increase/Do Not Increase and Successful/Not
Successful combinations.
d) The increase in sales dollars next year.
8. A company that manufactures designer jeans is contemplating whether to increase its advertising
budget by \$1 million for next year. If the expanded advertising campaign is successful, the company
expects sales to increase by \$1.6 million next year. If the advertising campaign fails, the company
expects sales to increase by only \$400,000 next year. If the advertising budget is not increased, the
company expects sales to increase by \$200,000. Identify the outcomes in this decision-making
problem.
a) Two choices: (1) increase the budget and (2) do not increase the budget.
b) Two possibilities: (1) campaign is successful and (2) campaign is not successful.
c) Four consequences resulting from the Increase/Do Not Increase and Successful/Not
Successful combinations.
d) The increase in sales dollars next year.
9. A company that manufactures designer jeans is contemplating whether to increase its advertising
budget by \$1 million for next year. If the expanded advertising campaign is successful, the company
expects sales to increase by \$1.6 million next year. If the advertising campaign fails, the company
expects sales to increase by only \$400,000 next year. If the advertising budget is not increased, the
company expects sales to increase by \$200,000. Identify the payoffs in this decision-making problem.
a) Two choices: (1) increase the budget and (2) do not increase the budget.
b) Two possibilities: (1) campaign is successful and (2) campaign is not successful.
c) Four consequences resulting from the Increase/Do Not Increase and Successful/Not
Successful combinations.
d) The increase in sales dollars next year.
20-4 Decision Making
SCENARIO 20-1
The following payoff table shows profits associated with a set of 3 alternatives under 2 possible states
of nature.
States A1 A2 A3
1 12 2 8
2 4 10 5
where: S1 is state of nature 1 A1 is action alternative 1
S2 is state of nature 2 A2 is action alternative 2
A3 is action alternative 3
10. Referring to Scenario 20-1, the opportunity loss for A3 when S2 occurs is
a) 0
b) 4
c) 5
d) 6
11. Referring to Scenario 20-1, the opportunity loss for A2 when S1 occurs is
a) – 2
b) 0
c) 5
d) 14
12. Referring to Scenario 20-1, if the probability of S1 is 0.4, then the probability of S2 is
a) 0.4
b) 0.5
c) 0.6
d) 1.0
Decision Making 20-5
13. Referring to Scenario 20-1, if the probability of S1 is 0.2 and S2 is 0.8, then the expected monetary
value of A1 is
a) 2.4
b) 5.6
c) 8
d) 16
14. Referring to Scenario 20-1, if the probability of S1 is 0.2 and S2 is 0.8, then the expected opportunity
loss (EOL) for A1 is
a) 0
b) 1.2
c) 4.8
d) 5.6
15. Referring to Scenario 20-1, if the probability of S1 is 0.2, what is the optimal alternative using EOL?
a) A1.
b) A2.
c) A3.
d) It cannot be determined.
16. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected monetary value (EMV )
for A1 is
a) 3
b) 4
c) 6.5
d) 8
20-6 Decision Making
17. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected monetary value (EMV )
for A2 is
a) 3
b) 4
c) 6.5
d) 8
18. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected opportunity loss (EOL)
for A1 is
a) 3
b) 4.5
c) 7
d) 8
19. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected opportunity loss (EOL)
for A3 is
a) 3
b) 4.5
c) 7
d) 8
20. Referring to Scenario 20-1, if the probability of S1 is 0.5, what is the optimal alternative using EMV?
a) A1
b) A2
c) A3
d) It cannot be determined.
Decision Making 20-7
21. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the EVPI for the payoff table is
a) – 3
b) 3
c) 8
d) 11
22. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the coefficient of variation for A1 is
a) 0.231
b) 0.5
c) 1.5
d) 2
23. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the coefficient of variation for A2 is
a) 0.231
b) 0.5
c) 1.5
d) 2
24. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the return to risk ratio for A1 is
a) 0.667
b) 1.5
c) 2
d) 4.333
20-8 Decision Making
25. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the return to risk ratio for A3 is
a) 0.667
b) 1.5
c) 2
d) 4.333
26. Referring to Scenario 20-1, if the probability of S1 is 0.5, then the expected profit under certainty
(EPUC ) is
a) 3
b) 5
c) 8
d) 11
27. Referring to Scenario 20-1, what is the best action using the maximax criterion?
a) Action A1
b) Action A2
c) Action A3
d) It cannot be determined.
28. Referring to Scenario 20-1, what is the best action using the maximin criterion?
a) Action A1
b) Action A2
c) Action A3
d) It cannot be determined.
Decision Making 20-9
29. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. The number of alternatives for the payoff table is
a) 2
b) 3
c) 4
d) It cannot be determined.
30. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. The number of states of nature for the payoff table is
a) 2
b) 3
c) 4
d) It cannot be determined.
31. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. The payoff for buying 200 dozen roses and selling 100 dozen roses at the full price is
a) \$2,000
b) \$1,000
c) \$500
d) – \$500
20-10 Decision Making
32. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. The payoff for buying and selling 400 dozen roses at the full price is
a) \$12,000
b) \$6,000
c) \$4,000
d) It cannot be determined.
33. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. The opportunity loss for buying 200 dozen roses and selling 100 dozen roses at the full price is
a) \$1,000
b) \$500
c) – \$500
d) – \$2,000
34. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. The opportunity loss for buying 400 dozen roses and selling 200 dozen roses at the full price is
a) – \$2,000
b) \$1,000
c) \$500
d) \$0
Decision Making 20-11
35. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. If the probability of selling 100 dozen roses is 0.2 and 200 dozen roses is 0.5, then the
probability of selling 400 dozen roses is
a) 0.7
b) 0.5
c) 0.3
d) 0.2
36. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
respectively, then the EMV for buying 200 dozen roses is
a) \$4,500
b) \$2,500
c) \$1,700
d) \$1,000
37. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
respectively, then the EOL for buying 200 dozen roses is
a) \$700
b) \$900
c) \$1,500
d) \$1,600
20-12 Decision Making
38. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
respectively, then the optimal EOL for buying roses is
a) \$700
b) \$900
c) \$1,500
d) \$1,600
39. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
respectively, then the optimal alternative using EMV for selling roses is to buy dozen
roses.
a) 100
b) 200
c) 400
d) 600
40. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
respectively, then the optimal EMV for buying roses is
a) \$700
b) \$900
c) \$1,700
d) \$1,900
Decision Making 20-13
41. Blossom’s Flowers purchases roses for sale for Valentine’s Day. The roses are purchased for \$10 a
dozen and are sold for \$20 a dozen. Any roses not sold on Valentine’s Day can be sold for \$5 per
dozen. The owner will purchase 1 of 3 amounts of roses for Valentine’s Day: 100, 200, or 400 dozen
roses. Given 0.2, 0.4, and 0.4 are the probabilities for the sale of 100, 200, or 400 dozen roses,
respectively, then the EVPI for buying roses is
a) \$700
b) \$1,500
c) \$1,900
d) \$2,600
42. Referring to Scenario 20-2, the EMV for Action A is
a) \$300
b) \$550
c) \$600
d) \$700
43. Referring to Scenario 20-2, the EOL for Action A is
a) 0
b) 100
c) 200
d) 300
20-14 Decision Making
44. Referring to Scenario 20-2, the coefficient of variation for Action A is
a) 12.8%
b) 33.3%
c) 133.33%
d) 333.3%
45. Referring to Scenario 20-2, the return to risk ratio for Action B is
a) 0.167
b) 3.0
c) 6.0
d) 9.0
46. Referring to Scenario 20-2, what is the action with the preferable return to risk ratio?
a) Action A
b) Action B
c) Either Action A or Action B
d) It cannot be determined.
47. Referring to Scenario 20-2, what is the best action using the maximax criterion?
a) Action A
b) Action B
c) Either Action A or Action B
d) It cannot be determined.
Decision Making 20-15
48. Referring to Scenario 20-2, what is the best action using the maximin criterion?
a) Action A
b) Action B
c) Either Action A or Action B
d) It cannot be determined.
49. Referring to Scenario 20-2, what is the action with the preferable coefficient of variation?
a) Action A
b) Action B
c) Either Action A or Action B
d) It cannot be determined.
50. Referring to Scenario 20-2, what is the optimal action using the EMV criterion?
a) Action A
b) Action B
c) Either Action A or Action B
d) It cannot be determined.
51. Referring to Scenario 20-2, what is the optimal action using the EOL criterion?
a) Action A
b) Action B
c) Either Action A or Action B
d) It cannot be determined.
20-16 Decision Making
52. Referring to Scenario 20-2, the EVPI is
a) 0
b) 300
c) 400
d) 600
53. Referring to Scenario 20-2, the expected profit under certainty (EPUC ) is
a) 0
b) 300
c) 500
d) 600
54. For a potential investment of \$5,000, a portfolio has an EMV of \$1,000 and a standard deviation of
\$100. What is the rate of return?
a) 5%
b) 10%
c) 20%
d) 50%
55. For a potential investment of \$5,000, a portfolio has an EMV of \$1,000 and a standard deviation of
\$100. What is the coefficient of variation?
a) 10%
b) 20%
c) 50%
d) 100%
Decision Making 20-17
56. For a potential investment of \$5,000, a portfolio has an EMV of \$1,000 and a standard deviation of
\$100. The return to risk ratio is
a) 50
b) 20
c) 10
d) 5
57. The minimum expected opportunity loss is also equal to
a. expected profit under certainty.
b. expected value of perfect information.
c. coefficient of variation.
d. expected value under certainty minus the expected monetary value of the worst
alternative.
58. Referring to Scenario 20-3, what is the coefficient of variation for investment A?
a) 90.0%
b) 11.1%
c) 8.3%
d) 5.0%
20-18 Decision Making
59. Referring to Scenario 20-3, which investment has the optimal coefficient of variation?
a) Investment A
b) Investment B
c) The investments are equal.
d) It cannot be determined.
60. Referring to Scenario 20-3, which investment has the optimal return to risk ratio?
a) Investment A
b) Investment B
c) The investments are equal.
d) It cannot be determined.
61. Referring to Scenario 20-3, what is the return to risk ratio for Investment B?
a) 8
b) 10
c) 12
d) 24
SCENARIO 20-4
A stock portfolio has the following returns under the market conditions listed below.
Market Condition Probability Return
Bull 0.4 \$200
Stable 0.3 \$100
Bear 0.3 \$100
Decision Making 20-19
62. Referring to Scenario 20-4, what is the EMV?
a) \$180
b) \$130
c) \$90
d) \$80
63. Referring to Scenario 20-4, what is the standard deviation?
a) 4,890
b) 4,840
c) 124.9
d) 69.6
64. Referring to Scenario 20-4, what is the coefficient of variation?
a) 88.8%
b) 90.3%
c) 100%
d) 156.1%
65. Referring to Scenario 20-4, what is the return to risk ratio?
a) 0.64
b) 1.08
c) 1.18
d) 2.00
20-20 Decision Making
66. The curve for the will show a rapid increase in utility for initial amounts of money
followed by a gradual leveling off for increasing dollar amounts.
a) risk taker
b) risk averter
c) risk neutral
d) profit seeker
67. Look at the utility function graphed below and select the type of decision maker that corresponds to
the graph.
a) Risk averter
b) Risk neutral
c) Risk taker
d) Risk player
Monetary Outcome
Utility
68. The risk seeker’s curve represents the utility of one who enjoys taking risks. Therefore, the slope of
the utility curve becomes for large dollar amounts.
a) smaller
b) stable
c) larger
d) uncertain
Decision Making 20-21
69. _________ is a procedure for revising probabilities based upon additional information.
a) Utility theory
b) Bernoulli’s theorem
c) Beckman’s theorem
d) Bayes’ theorem
70. Look at the utility function graphed below and select the type of decision maker that corresponds to
the graph.
a) Risk averter
b) Risk neutral
c) Risk taker
d) Risk player
Monetary Outcome
Utility
71. The curve represents the expected monetary value approach.
a) risk averter’s
b) risk taker’s
c) risk neutral
d) Bernoulli
20-22 Decision Making
72. Look at the utility function graphed below and select the type of decision-maker that corresponds to
the graph.
a) Risk averter
b) Risk neutral
c) Risk taker
d) Risk player
Monetary Outcome
Utility
73. In a local cellular phone area, company A accounts for 60% of the cellular phone market, while
company B accounts for the remaining 40% of the market. Of the cellular calls made with company
A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B
will have interference. If a cellular call is selected at random, the probability that it will have
interference is
a) 0.014
b) 0.028
c) 0.14
d) 0.986
Decision Making 20-23
74. In a local cellular phone area, company A accounts for 60% of the cellular phone market, while
company B accounts for the remaining 40% of the market. Of the cellular calls made with company
A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B
will have interference. If a cellular call is selected at random, the probability that it will not have
interference is
a) 0.014
b) 0.028
c) 0.14
d) 0.986
75. In a local cellular phone area, company A accounts for 60% of the cellular phone market, while
company B accounts for the remaining 40% of the market. Of the cellular calls made with company
A, 1% of the calls will have some sort of interference, while 2% of the cellular calls with company B
will have interference. If a cellular call is selected at random and has interference, what is the
probability that it was with company A?
a) 0.071
b) 0.429
c) 0.571
d) It cannot be determined.
76. At Eastern University, 60% of the students are from suburban areas, 30% are from rural areas, and
10% are from urban areas. Of the students from the suburban areas, 60% are nonbusiness majors. Of
the students from the rural areas, 70% are nonbusiness majors. Of the students from the urban areas,
90% are nonbusiness majors. The probability that a randomly selected student is a business major is
a) 0.66
b) 0.54
c) 0.44
d) 0.34
20-24 Decision Making
77. At Eastern University, 60% of the students are from suburban areas, 30% are from rural areas, and
10% are from urban areas. Of the students from the suburban areas, 60% are nonbusiness majors. Of
the students from the rural areas, 70% are nonbusiness majors. Of the students from the urban areas,
90% are nonbusiness majors. If a randomly selected student is not a business major, the probability
that the student is from the urban area is
a) 0.136
b) 0.214
c) 0.666
d) 0.706
78. True or False: Removal of uncertainty from a decision-making problem leads to a case referred to as
perfect information.
79. True or False: Opportunity loss is the difference between the lowest profit for an event and the actual
profit obtained for an action taken.
80. True or False: To calculate expected profit under certainty, you need to have perfect information
about which event will occur.
81. In portfolio analysis, the _______ is the reciprocal of the return to risk ratio.
Decision Making 20-25
82. The risk-_______ curve shows a rapid increase in utility for initial amounts of money followed by a
gradual leveling off for increasing dollar amounts.
83. The risk- _______ curve represents the expected monetary value approach.
SCENARIO 20-5
The following payoff table shows profits associated with a set of 2 alternatives under 3 possible
events.
Action
Event A B
1 1000 1200
2 500 700
3 300 200
Suppose that the probability of Event 1 is 0.2, Event 2 is 0.5, and Event 3 is 0.3.
84. Referring to Scenario 20-5, what is the EMV for Action A?
85. Referring to Scenario 20-5, what is the EMV for Action B?
86. Referring to Scenario 20-5, what is the opportunity loss for Action B with Event 3?
20-26 Decision Making
87. Referring to Scenario 20-5, what is the opportunity loss for Action B with Event 1?
88. Referring to Scenario 20-5, what is the opportunity loss for Action A with Event 1?
89. Referring to Scenario 20-5, what is the opportunity loss for Action A with Event 2?
90. Referring to Scenario 20-5, what is the EOL for Action A?
91. Referring to Scenario 20-5, what is the EOL for Action B?
92. Referring to Scenario 20-5, what is the optimal action using maximax criterion?
93. Referring to Scenario 20-5, what is the optimal action using maximin criterion?
Decision Making 20-27
94. Referring to Scenario 20-5, what is the optimal action using EMV?
95. Referring to Scenario 20-5, what is the optimal action using EOL?
96. Referring to Scenario 20-5, what is the EVPI for this problem?
97. Referring to Scenario 20-5, what is the expected profit under certainty (EPUC ) for this problem?
98. Referring to Scenario 20-5, what is the standard deviation for Action A?
99. Referring to Scenario 20-5, what is the coefficient of variation for Action A?
100. Referring to Scenario 20-5, what is the return to risk ratio for Action B?
20-28 Decision Making
101. Referring to Scenario 20-5, what is the optimal action using the coefficient of variation?
102. Referring to Scenario 20-5, what is the optimal action using the return to risk ratio?
SCENARIO 20-6
A student wanted to find out the optimal strategy to study for a Business Statistics exam. He
constructed the following payoff table based on the mean amount of time he needed to study every
week for the course and the degree of difficulty of the exam. From the information that he gathered
from students who had taken the course, he concluded that there was a 40% probability that the exam
would be easy.
16 hours 8 hours 4 hours
Easy Exam 40 60 80
Difficult Exam 100 50 0
103. Referring to Scenario 20-6, how many possible courses of action are there?
104. Referring to Scenario 20-6, how many possible events are there?
105. Referring to Scenario 20-6, what is the opportunity loss of spending 4 hours per week on average
studying for the exam when the exam turns out to be easy?
Decision Making 20-29
106. Referring to Scenario 20-6, what is the opportunity loss of spending 16 hours per week on average
studying for the exam when the exam turns out to be easy?
107. Referring to Scenario 20-6, what is the opportunity loss of spending 8 hours per week on average
studying for the exam when the exam turns out to be difficult?
108. Referring to Scenario 20-6, what is the expected monetary value of spending 8 hours per week on
average studying for the exam?
109. Referring to Scenario 20-6, what is the expected opportunity loss of spending 8 hours per week on
average studying for the exam?
110. Referring to Scenario 20-6, what is the coefficient of variation of spending 8 hours per week on
average studying for the exam?
111. Referring to Scenario 20-6, what is the return-to-risk ratio of spending 8 hours per week on average
studying for the exam?
20-30 Decision Making
112. Referring to Scenario 20-6, what is the expected value of perfect information?
113. Referring to Scenario 20-6, what is the maximum amount that the student is willing to pay to obtain
perfect information?
114. Referring to Scenario 20-6, what is the expected profit under certainty?
115. Referring to Scenario 20-6, what would be the expected profit if the student had perfect information
on whether the exam will be easy or difficult?
116. True or False: Referring to Scenario 20-6, the optimal strategy using the expected monetary value
criterion is to study 8 hours per week on average for the exam.
117. True or False: Referring to Scenario 20-6, the optimal strategy using the expected monetary value
criterion is to study 16 hours per week on average for the exam.
Decision Making 20-31
118. True or False: Referring to Scenario 20-6, the optimal strategy using the return-to-risk ratio
criterion is to study 8 hours per week on average for the exam.
119. True or False: Referring to Scenario 20-6, the optimal strategy using the coefficient of variation
criterion is to study 8 hours per week on average for the exam.
120. True or False: Referring to Scenario 20-6, the optimal strategy using the expected opportunity loss
criterion is to study 8 hours per week on average for the exam.
121. True or False: Referring to Scenario 20-6, the optimal strategy using the expected opportunity loss
criterion is to study 16 hours per week on average for the exam.
122. True or False: Referring to Scenario 20-6, the optimal strategy using the maximax criterion is to
study 8 hours per week on average for the exam.
123. True or False: Referring to Scenario 20-6, the optimal strategy using the maximax criterion is to
study 16 hours per week on average for the exam.
20-32 Decision Making
124. True or False: Referring to Scenario 20-6, the optimal strategy using the maximin criterion is to
study 16 hours per week on average for the exam.
125. True or False: Referring to Scenario 20-6, the optimal strategy using the maximin criterion is to
study 8 hours per week on average for the exam.
126. Which of the following is NOT a decision making criterion?
a. Maximizing the expected monetary value of an action.
b. Minimizing the expected opportunity loss of an action.
c. Minimizing expected profit under certainty.
d. Maximizing the return-to-risk ratio.

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