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Exam 17: Decision-Making Tools

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Question 51

Multiple Choice

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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

F) B) and E)
G) None of the above

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Question 52

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The maximax criterion of decision making requires that all decision alternatives have an equal probability of occurrence.

A) True
B) False

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Question 53

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Bratt's Bed and Breakfast, in a small historic New England town, must decide how to subdivide (remodel) the large old home that will become an inn. There are three alternatives: Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults. Option B would modernize only the second floor; the results would be six suites, four for two to four adults, and two for two adults only. Option C (the status quo option) leaves all walls intact. In this case, there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths. Below are the details of profit and demand patterns that will accompany each option. Which option has the highest expected value?

Doing nothing would yield how much profit if favorable market conditions prevail according to the following profit decision table?

In a decision tree, a round symbol represents a state of nature node.

There are three equally likely states of nature (High, Medium, and Low demand) . If the large factory will post profits of $60,000, $25,000, and -$10,000 under these states of nature, respectively, what is the EMV of the factory?

A decision maker using the maximax criterion on the problem below would choose Alternative ________ because the maximum of the row maximums is ________.

The first step in the analytic decision process is to clearly define the problem and the factors that influence it.

Decision trees:

The square symbol used in drawing a decision tree represents a(n) ________ node.

An example of a conditional value would be the payoff from selecting a particular alternative when a particular state of nature occurs.

A(n) ________ is an occurrence or situation over which the decision maker has little or no control.

________ is the criterion for decision making under uncertainty that finds an alternative that maximizes the minimum outcome.

A state of nature is an occurrence or a situation over which the decision maker has little or no control.

Identify and describe three methods used for decision making under conditions of uncertainty.

Daily sales of bread by Salvador Monella's Baking Company follow the historical pattern shown in the table below. It costs the bakery 80 cents to produce a loaf of bread, which sells for $1.50. Any bread unsold at the end of the day is sold to the parish jail for 25 cents per loaf. Construct the decision table of conditional payoffs. How many loaves should Sal bake each day in order to maximize contribution?

What is the outcome of an alternative/state of nature combination called?

Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. Develop a decision tree for this situation and indicate which type of truck he should select.

What is the EMV for Option 2 in the following decision table?

What is the expected value with perfect information in the following decision table?