Operations Management, 11e (Heizer/Render)
Module A Decision-Making Tools
Section 1 The Decision Process in Operations
1) Analytic decision making is based on logic and considers all available data and possible alternatives.
2) The last step in the analytic decision process is to clearly define the problem and the factors that
influence it.
3) Which of the following is NOT considered a step in the decision–making process?
A) Clearly define the problem and the factors that influence it.
B) Select the best alternative.
C) Develop specific and measurable objectives.
D) Evaluate each alternative solution based on its merits and drawbacks.
E) Minimize costs whenever possible.
4) The first step, and a key element, in the decision-making process is to:
A) consult a specialist.
B) clearly define the problem.
C) develop objectives.
D) monitor the results.
E) select the best alternative.
5) The last step of the decision-making process is to:
A) develop a model.
B) evaluate each alternative.
C) select the best alternative.
D) implement the decision.
E) check the decision with senior management.
6) Identify, in order, the six steps of analytical decision making.
Section 2 Fundamentals of Decision Making
1) A state of nature is an occurrence or a situation over which the decision maker has little or no control.
2) In a decision tree, a square symbol represents a state of nature node.
3) A square node on a decision tree infers that:
A) the node splits into various states of nature, of which only one will occur.
B) there are several alternatives available.
C) the manager must choose an alternative.
D) Both B and C
E) A, B, and C
4) The following decision tree has how many state of nature nodes?
A) 0
B) 1
C) 2
D) 3
E) 4
5) In terms of decision theory, an occurrence or situation over which the decision maker has no control is
called a(n):
A) decision under uncertainty.
B) decision tree.
C) state of nature.
D) alternative.
E) EMV.
6) A(n) ________ is an occurrence or situation over which the decision maker has little or no control.
7) The square symbol used in drawing a decision trees represents a(n) ________ node.
8) In the context of decision-making, define a state of nature.
9) In the context of decision making, define an alternative.
10) Explain the symbols used in decision tree analysis.
Section 3 Decision Tables
1) An example of a conditional value would be the payoff from selecting a particular alternative when a
particular state of nature occurs.
2) What is a tabular presentation that shows the outcome for each decision alternative under the various
possible states of nature called?
A) isoquant table
B) payback period matrix
C) payoff table
D) feasible region
E) decision tree
3) What is the outcome of an alternative/state of nature combination called?
A) price
B) conditional value
C) expected value
D) conditional probability
E) conditional expectation
4) Doing nothing would yield how much profit if favorable market conditions prevail according to the
following profit decision table?
Alternative
Favorable market
Unfavorable Market
Do Nothing
$20,000
-$10,000
A) $5,000
B) $20,000
C) -$10,000
D) $0
E) $10,000
5) A retailer is deciding how many units of a certain product to stock. The historical probability
distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product
costs $8 per unit and sells for $25 per unit. What is the conditional value for the decision alternative
“Stock 3” and state of nature “Sell 1“?
A) 1.4 units
B) $1 profit
C) $25 profit
D) $-8 profit
E) $23.80 profit
6) A retailer is deciding how many units of a certain product to stock. The historical probability
distribution of sales for this product is 0 units, 0.2; 1 unit, 0.3; 2 units, 0.4, and 3 units, 0.1. The product
costs $8 per unit and sells for $25 per unit. What is the largest conditional value (profit) in the entire
payoff table for this scenario?
A) $-24 profit
B) $-8 profit
C) $17 profit
D) $51 profit
E) $75 profit
7) A(n) ________ is a tabular means of analyzing decision alternatives and states of nature.
8) What are decision tables?
9) What is a conditional value?
Section 4 Types of Decision-Making Environments
1) If a decision maker can assign probabilities of occurrences to the states of nature, then the decision–
making environment is Decision Making under Uncertainty.
2) The maximax criterion of decision making requires that all decision alternatives have an equal
probability of occurrence.
3) The maximin criterion is pessimistic, while the maximax criterion is optimistic.
4) If a decision maker knows for sure which state of nature will occur, he/she is making a decision under
certainty.
5) The expected value with perfect information assumes that all states of nature are equally likely.
6) An example of expected monetary value would be the payoff from selecting a particular alternative
when a particular state of nature occurs.
7) The expected monetary value of a decision alternative is the sum of all possible payoffs from the
alternative, each weighted by the probability of that payoff occurring.
8) If a decision maker has to make a particular decision only once, expected monetary value is a good
indication of the payoff associated with the decision.
9) The expected value of perfect information is the same as the expected value with perfect information.
10) What decision criterion would be used by an optimistic decision maker solving a problem under
conditions of uncertainty?
A) expected monetary value
B) equally likely
C) maximax
D) maximin
E) minimin
11) A decision maker who uses the maximin criterion when solving a problem under conditions of
uncertainty is:
A) an optimist.
B) a pessimist.
C) an economist.
D) an optometrist.
E) making a serious mistake; maximin is not appropriate for conditions of uncertainty.
12) Expected monetary value is most appropriate for problem solving that takes place:
A) when conditions are average.
B) when all states of nature are equally likely.
C) when all alternatives are equally likely.
D) under conditions of uncertainty.
E) under conditions of risk.
13) There are three equally likely states of nature (High, Medium, and Low demand). If the large factory
will post profits of $50,000, $25,000, and – $10,000 under these states of nature, respectively, what is the
EMV of the factory?
A) $50,000
B) $25,000
C) $28,333.33
D) $21,666.67
E) $65,000
14) A plant manager wants to know how much he should be willing to pay for perfect market research.
Currently there are two states of nature facing his decision to expand or do nothing. Under favorable
market conditions the manager would make $100,000 for the large plant and $5,000 for the small plant.
Under unfavorable market conditions the large plant would lose $50,000 and the small plant would make
$0. If the two states of nature are equally likely, how much should he pay for perfect information?
A) $0
B) $25,000
C) $50,000
D) $100,000
E) $145,000
15) The expected value with perfect information:
A) equals EVPI – Maximum EMV.
B) requires that each decision alternative have a known probability of occurrence.
C) is an input into the calculation of the expected value of perfect information.
D) is the average of the maximax and the maximin.
E) none of the above
16) What is the difference between the expected payoff under perfect information and the maximum
expected payoff under risk?
A) expected monetary value
B) economic order quantity
C) expected value of perfect information
D) PERT
E) expected monetary payoff
17) The likelihood that a decision maker will ever receive a payoff precisely equal to the EMV when
making any one decision is:
A) low (near 0%).
B) high (near 100%).
C) dependent upon the number of alternatives.
D) dependent upon the number of states of nature.
E) none of the above
18) The expected value of perfect information (EVPI) is the:
A) payoff for a decision made under perfect information.
B) payoff under minimum risk.
C) average expected payoff.
D) difference between the payoff under perfect information and the payoff under risk.
E) greater of EVwPI and Maximum EMV.
19) A decision maker using the maximax criterion on the problem below would choose Alternative
________ because the maximum of the row maximums is ________.
States of Nature
1
2
3
Alternative A
50
55
60
Alternative B
30
50
80
Alternative C
70
80
70
Alternative D
–100
–10
140
A) A; 60
B) B; 80
C) C; 70
D) D; –100
E) D; 140
20) A decision maker using the maximin criterion on the problem below would choose Alternative
________ because the maximum of the row minimums is ________.
States of Nature
1
2
3
Alternative A
50
55
60
Alternative B
30
50
80
Alternative C
70
80
70
Alternative D
–100
–10
140
A) A; 55
B) B; 30
C) C; 70
D) D; 140
E) D; 10
21) For the following decision table, the highest value for the equally likely criterion is ________; this
occurs with alternative ________.
Alternatives
S1
S2
Option 1
$10,000
$30,000
Option 2
$5,000
$45,000
Option 3
$-4,000
$60,000
A) $20,000; Option 1
B) $25,000; Option 2
C) $28,000; Option 3
D) $32,000; Option 3
E) $60,000; Option 3
22) What is the EMV for Option 1 in the following decision table?
Alternatives
S1
S2
p
.3
.7
Option 1
15,000
20,000
Option 2
10,000
30,000
A) 15,000
B) 17,000
C) 17,500
D) 18,500
E) 20,000
23) The expected value with perfect information is:
A) the maximum EMV for a set of alternatives.
B) the same as the expected value of perfect information.
C) the difference between the payoff under perfect information and the payoff under risk.
D) the expected return obtained when the decision maker knows which state of nature is going to occur
before the decision is made.
E) obtained using conditional probabilities.
24) What is the EMV for Option 2 in the following decision table?
Alternatives
S1
S2
p
.3
.7
Option 1
15,000
20,000
Option 2
10,000
30,000
A) 10,000
B) 16,000
C) 20,000
D) 24,000
E) 30,000
25) What is the EMV for Option 1 in the following decision table?
Alternatives
S1
S2
p
.4
.6
Option 1
10,000
30,000
Option 2
5,000
45,000
Option 3
-4,000
60,000
A) 10,000
B) 18,000
C) 20,000
D) 22,000
E) 30,000
26) What is the EMV for Option 2 in the following decision table?
Alternatives
S1
S2
p
.4
.6
Option 1
10,000
30,000
Option 2
5,000
45,000
Option 3
-4,000
60,000
A) 5,000
B) 21,000
C) 25,000
D) 29,000
E) 45,000
27) What is the expected value with perfect information of the following decision table?
Alternatives
S1
S2
p
.4
.6
Option 1
10,000
30,000
Option 2
5,000
45,000
Option 3
-4,000
60,000
A) 5,000
B) 10,000
C) 40,000
D) 60,000
E) 70,000
28) What is the EMV for Option 1 in the following decision table?
Alternatives
S1
S2
p
.6
.4
Option 1
200
300
Option 2
50
350
A) 200
B) 240
C) 250
D) 260
E) 300
29) What is the EMV for Option 2 in the following decision table?
Alternatives
S1
S2
p
.6
.4
Option 1
200
300
Option 2
50
350
A) 50
B) 100
C) 170
D) 200
E) 350
30) What is the expected value with perfect information in the following decision table?
Alternatives
S1
S2
p
.6
.4
Option 1
200
300
Option 2
50
350
A) 50
B) 200
C) 260
D) 300
E) 350
31) What is the expected value of perfect information of the following decision table?
Alternatives
S1
S2
p
.6
.4
Option 1
200
300
Option 2
50
350
A) 0
B) 20
C) 50
D) 150
E) 200
32) ________ is the criterion for decision making under uncertainty that finds an alternative that
maximizes the minimum outcome.
33) ________ is the criterion for decision making under uncertainty that assigns equal probability to each
state of nature.
34) ________ is the expected payout or value of a variable that has different possible states of nature, each
with an associated probability.
35) ________ is the difference between the payoff under perfect information and the payoff under risk.
36) How is the expected value of perfect information (EVPI) found?
37) Identify and describe three methods used for decision making under conditions of uncertainty.
38) Which decision rule under uncertainty results in an optimistic decision? Why?
39) If a decision maker is a pessimist, what decision-making criterion is appropriate? Why?
40) Define expected monetary value (EMV).
41) Describe the meaning of EVPI.
42) The construction manager for Acme Construction, Inc. must decide whether to build single family
homes, apartments, or condominiums. This is not a product-mix problem, but an all-or-nothing decision.
He will hire workers and rent equipment appropriate for one action only. He estimates annual profits (in
thousands of dollars) will vary with population trends as follows:
Dwelling type
Population steady
Population grows
slowly
Population grows
rapidly
Single family
$100
$90
$70
Apartments
50
170
90
Condominiums
–20
100
220
a. If he uses the maximin criterion, which type of dwellings will he choose to build? Show your
supporting calculations.
b. If he uses the equally likely criterion, which kind of dwellings will he choose to build? Show your
supporting calculations.
c. If the construction manager were an optimist, what criterion would he choose? What would be the
choice of dwelling for that criterion? Show your supporting calculations.
43) An operations manager’s staff has compiled the information below for four manufacturing
alternatives (A, B, C, and D) that vary by production technology and the capacity of the machinery. All
choices enable the same level of total production and have the same lifetime. The four states of nature
represent four levels of consumer acceptance of the firm’s products. Values in the table are net present
value of future profits in millions of dollars.
States of Nature
1
2
3
4
Alternative A
50
55
60
65
Alternative B
30
50
80
130
Alternative C
70
80
70
65
Alternative D
–100
–10
150
220
a. Assuming a maximax strategy, which alternative would be chosen?
b. If maximin were used, which would be chosen?
c. If the states of nature were equally likely, which alternative should be chosen?