Quantitative Analysis for Management, 11e (Render)
Chapter 3 Decision Analysis
1) Expected monetary value (EMV) is the average or expected monetary outcome of a decision if it can be
repeated a large number of times.
2) Expected monetary value (EMV) is the payoff you should expect to occur when you choose a particular
alternative.
3) The decision maker can control states of nature.
4) All decisions that result in a favorable outcome are considered to be good decisions.
5) The difference in decision making under risk and decision making under uncertainty is that under risk, we
think we know the probabilities of the states of nature, while under uncertainty we do not know the probabilities
of the states of nature.
6) EVPI (expected value of perfect information) is a measure of the maximum EMV as a result of additional
information.
7) When using the EOL as a decision criterion, the best decision is the alternative with the largest EOL value.
8) To determine the effect of input changes on decision results, we should perform a sensitivity analysis.
9) The maximax decision criterion is used by pessimistic decision makers and maximizes the maximum outcome
for every alternative.
10) The maximin decision criterion is used by pessimistic decision makers and minimizes the maximum outcome
for every alternative.
11) Optimistic decision makers tend to discount favorable outcomes.
12) The decision theory processes of maximizing expected monetary value (EMV) and minimizing expected
opportunity loss (EOL) should lead us to choose the same alternatives.
13) The several criteria (maximax, maximin, equally likely, criterion of realism, minimax regret) used for decision
making under uncertainty may lead to the choice of different alternatives.
14) A decision table is sometimes called a payout table.
15) The nodes on decision trees represent either decisions or states of nature.
16) Any problem that can be presented in a decision table can also be graphically portrayed in a decision tree.
17) Any problem that can be represented in a decision tree can be easily portrayed in a decision table.
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18) In a decision table, all of the alternatives are listed down the left side of the table, while all of the possible
outcomes or states of nature are listed across the top.
19) The EMV approach and Utility theory always result in the same choice of alternatives.
20) Utility theory may help the decision maker include the impact of qualitative factors that are difficult to
include in the EMV model.
21) In a decision problem where we wish to use Bayes’ theorem to calculate posterior probabilities, we should
always begin our analysis with the assumption that all states of nature are equally likely, and use the sample
information to revise these probabilities to more realistic values.
22) A utility curve that shows utility increasing at an increasing rate as the monetary value increases represents
the utility curve of a risk seeker.
23) A utility curve that shows utility increasing at a decreasing rate as the monetary value increases represents the
utility curve of a risk seeker.
24) The criterion of realism is also called the Laplace criterion.
25) Utility values typically range from –1 to +1.
26) By studying a person’s Utility Curve, one can determine whether the individual is a risk seeker, risk avoider,
or is indifferent to risk.
27) The equally likely decision criterion is also called the Laplace criterion.
28) Utility theory provides a decision criterion that is superior to the EMV or EOL in that it may allow the
decision maker to incorporate her own attitudes toward risk.
29) The assignment of a utility value of 1 to an alternative implies that alternative is preferred to all others.
30) A second table (an opportunity loss table) must be computed when applying the maximin decision criterion.
31) The following figure illustrates a utility curve for someone who is a risk seeker.
32) An analytic and systematic approach to the study of decision making is referred to as
A) decision making under risk.
B) decision making under uncertainty.
C) decision theory.
D) decision analysis.
E) decision making under certainty.
33) What makes the difference between good decisions and bad decisions?
A) A good decision is based on logic.
B) A good decision considers all available data.
C) A good decision considers all alternatives.
D) A good decision applies quantitative approaches.
E) All the above
34) Expected monetary value (EMV) is
A) the average or expected monetary outcome of a decision if it can be repeated a large number of times.
B) the average or expected value of the decision, if you know what would happen ahead of time.
C) the average or expected value of information if it were completely accurate.
D) the amount you would lose by not picking the best alternative.
E) a decision criterion that places an equal weight on all states of nature.
35) Which of the following is not considered a criteria for decision making under uncertainty?
A) optimistic
B) pessimistic
C) equally likely
D) random selection
E) minimax regret
36) A pessimistic decision making criterion is
A) maximax.
B) equally likely.
C) maximin.
D) decision making under certainty.
E) minimax regret.
37) Which of the following is true about the expected value of perfect information?
A) It is the amount you would pay for any sample study.
B) It is calculated as EMV minus EOL.
C) It is calculated as expected value with perfect information minus maximum EMV.
D) It is the amount charged for marketing research.
E) None of the above
38) Which of the following is not a characteristic of a good decision?
A) based on logic
B) considers all available data
C) considers all possible alternatives
D) employs appropriate quantitative techniques
E) always results in a favorable outcome
39) The following is a payoff table giving profits for various situations.
What decision would an optimist make?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Do Nothing
E) State of Nature A
40) The following is a payoff table giving profits for various situations.
What decision would a pessimist make?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) Do Nothing
E) State of Nature A
41) The following is an opportunity loss table.
What decision should be made based on the minimax regret criterion?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature A
E) Does not matter
42) The following is an opportunity loss table.
What decision should be made based on the minimax regret criterion?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature C
E) Does not matter
43) The following is a payoff table.
What decision should be made based on the minimax regret criterion?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature C
E) Does not matter
44) The following is a payoff table.
What decision should be made based on the minimax regret criterion?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature C
E) Does not matter
45) The following is an opportunity–loss table.
The probabilities for the states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a person were to use the
expected opportunity loss criterion, what decision would be made?
A) Alternative 1
B) Alternative 2
C) Alternative 3
D) State of Nature C
E) State of Nature B
46) The following is a payoff table giving profits for various situations.
The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a person selected Alternative
1, what would the expected profit be?
A) 120
B) 133.33
C) 126
D) 180
E) None of the above
47) Dr. Mac, a surgeon, must decide what mode of treatment to use on Mr. Samuels. There are three modes of
treatment: Mode A, B, and C; and three possible states of nature: 1.Treatment succeeds and patient leads a normal
life, 2. Patient survives treatment but is permanently disabled, and 3. Patient fails to survive treatment. Dr. Mac
has prepared the decision table below. What mode of treatment maximizes the expected value?
A) Mode A
B) Mode B
C) Mode C
D) All three treatments are equally desirable.
E) Normal Life
48) Consider the following payoff table.
Based upon these probabilities, a person would select Alternative 2. Suppose there is concern about the accuracy
of these probabilities. It can be stated that Alternative 2 will remain the best alternative as long as the probability
of A is at least
A) 0.33.
B) 0.50.
C) 0.40.
D) 0.60.
E) None of the above
49) Consider the following payoff table.
How much should be paid for a perfect forecast of the state of nature?
A) 170
B) 30
C) 10
D) 100
E) 40
50) The following is a payoff table giving profits for various situations.
The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect forecast of the
future were available, what is the expected value with this perfect information?
A) 130
B) 160
C) 166
D) 36
E) None of the above
51) The following is a payoff table giving profits for various situations.
The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect forecast of the
future were available, what is the expected value of perfect information (EVPI)?
A) 166
B) 0
C) 36
D) 40
E) None of the above
52) Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has prepared a
payoff table to help analyze the situation.
As Nick does not know how his product will be received, he assumes that all three states of nature are equally
likely to occur. If he uses the equally likely criterion, what decision would he make?
A) Open 1
B) Open 2
C) Good market
D) Fair market
E) Do nothing
53) Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has prepared a
payoff table to help analyze the situation.
Nick believes there is a 40 percent chance that the market will be good, a 30 percent chance that it will be fair, and
a 30 percent chance that it will be poor. A market research firm will analyze market conditions and will provide a
perfect forecast (they provide a money back guarantee). What is the most that should be paid for this forecast?
A) $ 44,000
B) $ 53,000
C) $123,000
D) $176,000
E) $132,000
54) Which of the following is the fourth step of the “Six Steps in Decision Making”?
A) Select one of the mathematical decision theory models.
B) List the possible alternatives.
C) Apply the model and make your decision.
D) List the payoff or profit of each combination of alternatives and outcomes.
E) Identify the possible outcomes or states of nature.
55) Which of the following is not one of the steps considered in the “Six Steps in Decision Making”?
A) Clearly define the problem at hand
B) List the possible alternatives.
C) Apply the model and make your decision.
D) List the payoff or profit of each combination of alternatives and outcomes.
E) Evaluate the success of the decision.
56) Optimistic decision makers tend to ________.
A) magnify favorable outcomes
B) ignore bad outcomes
C) discount favorable outcomes
D) A and B
E) B and C
57) Pessimistic decision makers tend to ________.
A) magnify favorable outcomes
B) ignore bad outcomes
C) discount favorable outcomes
D) A and B
E) B and C
58) In decision theory, we call the payoffs resulting from each possible combination of alternatives and outcomes
________.
A) marginal values
B) conditional values
C) conditional probabilities
D) Bayesian values
E) joint values
59) Another name for a decision table is a ________.
A) payment table
B) payout table
C) payoff table
D) pay–up table
E) decision tree
60) How are decision tables organized?
A) alternatives down the left, states of nature on top, payoffs inside
B) states of nature down the left, alternatives on top, payoffs inside
C) alternatives down the left, payoffs on top, states of nature inside
D) payoffs down the left, alternatives on top, states of nature inside
E) states of nature down the left, payoffs on top, alternatives inside
61) The three decision–making environments are decision making under ________.
A) utility, risk, and certainty
B) utility, risk, and uncertainty
C) utility, certainty, and uncertainty
D) utility, equity, and certainty
E) risk, certainty, and uncertainty
62) In decision making under ________, there are several possible outcomes for each alternative, and the decision
maker does not know the probabilities of the various outcomes.
A) risk
B) utility
C) certainty
D) probability
E) uncertainty
63) In decision making under ________, there are several possible outcomes for each alternative, and the decision
maker knows the probability of occurrence of each outcome.
A) risk
B) utility
C) certainty
D) probability
E) uncertainty
64) The optimistic decision criterion is the criterion of ________.
A) maximax
B) maximin
C) realism
D) equally likely
E) minimax regret
65) The Hurwicz criterion is also called the criterion of ________.
A) regret
B) equality
C) optimism
D) realism
E) pessimism
66) The equally likely criterion is also called the ________ criterion.
A) Hurwicz
B) uncertainty
C) Laplace
D) LaFlore
E) Huchenmeizer
67) Decision trees are particularly useful when
A) perfect information is available.
B) formulating a conditional values table.
C) the opportunity loss table is available.
D) a sequence of decisions must be made.
E) all possible outcomes and alternatives are not known.
68) The expected value of sample information (EVSI) can be used to
A) establish a maximum amount to spend on additional information.
B) calculate conditional probabilities.
C) establish risk avoidance.
D) provide points on a utility curve.
E) None of the above
69) A market research survey is available for $10,000. Using a decision tree analysis, it is found that the expected
monetary value with no survey is $62,000. If the expected value of sample information is –$7,000, what is the
expected monetary value with the survey?
A) $45,000
B) $62,000
C) –$17,000
D) $55,000
E) None of the above