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Exam 7: Decision Theory– Static

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Question 41

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The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows: If he uses the minimax regret criterion, which alternative will he decide to select?

A)  do nothing
B)  expand
C)  build new
D)  either do nothing or expand
E)  either expand or build new

F) B) and D)
G) B) and E)

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Question 42

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Sensitivity analysis is useful because:

A)  payoffs and probabilities are estimates.
B)  most decisions will affect employees.
C)  expected payoffs are sensitive to the time value of money.
D)  it is the second step in the decision model.
E)  with the passage of time, small decisions get bigger.

F) B) and E)
G) C) and E)

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Question 43

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Consider the following decision scenario: The minimax regret strategy would be:

Consider the following decision scenario: The maximin strategy would be:

Expected monetary value gives the long-run average payoff if a large number of identical decisions could be made.

Consider the following decision scenario: If P(high) is .60, the choice for maximum expected value would be:

The local operations manager for the Internal Revenue Service must decide whether to hire one, two, or three temporary tax examiners for the upcoming tax season. She estimates that net revenues (in thousands of dollars) will vary with how well taxpayers comply with the new tax code just passed by Congress, as follows: If she feels the chances of low, medium, and high compliance are 20 percent, 30 percent, and 50 percent respectively, what are the expected net revenues for the number of assistants she will decide to hire?

The local operations manager for the Internal Revenue Service must decide whether to hire one, two, or three temporary tax examiners for the upcoming tax season. She estimates that net revenues (in thousands of dollars) will vary with how well taxpayers comply with the new tax code just passed by Congress, as follows: If she uses the Laplace criterion, how many new examiners will she decide to hire?

Two professors at a nearby university want to coauthor a new textbook in either economics or statistics. They feel that if they write an economics book, they have a 50 percent chance of placing it with a major publisher, and it should ultimately sell about 40,000 copies. If they cannot get a major publisher to take it, then they feel they have an 80 percent chance of placing it with a smaller publisher, with ultimate sales of 30,000 copies. On the other hand, if they write a statistics book, they feel they have a 40 percent chance of placing it with a major publisher, and it should result in ultimate sales of about 50,000 copies. If they cannot get a major publisher to take it, they feel they have a 50 percent chance of placing it with a smaller publisher, with ultimate sales of 35,000 copies. What is the probability that the statistics book would wind up being placed with a smaller publisher?

Two professors at a nearby university want to coauthor a new textbook in either economics or statistics. They feel that if they write an economics book, they have a 50 percent chance of placing it with a major publisher, and it should ultimately sell about 40,000 copies. If they cannot get a major publisher to take it, then they feel they have an 80 percent chance of placing it with a smaller publisher, with ultimate sales of 30,000 copies. On the other hand, if they write a statistics book, they feel they have a 40 percent chance of placing it with a major publisher, and it should result in ultimate sales of about 50,000 copies. If they cannot get a major publisher to take it, they feel they have a 50 percent chance of placing it with a smaller publisher, with ultimate sales of 35,000 copies. What is the probability that the economics book would wind up being placed with a smaller publisher?

The local operations manager for the Internal Revenue Service must decide whether to hire one, two, or three temporary tax examiners for the upcoming tax season. She estimates that net revenues (in thousands of dollars) will vary with how well taxpayers comply with the new tax code just passed by Congress, as follows: If she uses the maximin criterion, how many new examiners will she decide to hire?

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows: If he uses the minimax regret criterion, which kind of dwellings will he decide to build?

Bounded rationality refers to the limits imposed on decision making because of costs, human abilities, time, technology, and/or availability of information.

The head of operations for a movie studio wants to determine which of two new scripts they should select for their next major production. (Due to budgeting constraints, only one new picture can be undertaken at this time.) She feels that script 1 has a 70 percent chance of earning about $10,000,000 over the long run, but a 30 percent chance of losing $2,000,000. If this movie is successful, then a sequel could also be produced, with an 80 percent chance of earning $5,000,000, but a 20 percent chance of losing $1,000,000. On the other hand, she feels that script 2 has a 60 percent chance of earning $12,000,000, but a 40 percent chance of losing $3,000,000. If successful, its sequel would have a 50 percent chance of earning $8,000,000, but a 50 percent chance of losing $4,000,000. Of course, in either case, if the original movie were a flop, then no sequel would be produced. What is the expected value for the optimum decision alternative?

The range of probability for which an alternative has the best expected payoff can be determined by:

Departmentalizing decisions increases the risk of __________ leading to a poor decision.

Consider the following decision scenario: With equally likely states of nature, the alternative that has the largest expected monetary value is:

The operations manager for a well-drilling company must recommend whether to build a new facility, expand his existing one, or do nothing. He estimates that long-run profits (in $000) will vary with the amount of precipitation (rainfall) as follows: If he feels the chances of low, normal, and high precipitation are 30 percent, 20 percent, and 50 percent respectively, what are expected long-run profits for the alternative he will select?

The construction manager for Acme Construction, Inc., must decide whether to build single-family homes, apartments, or condominiums. He estimates annual profits (in $000) will vary with the population trend as follows: If he uses the maximin criterion, which kind of dwellings will he decide to build?

The owner of Tastee Cookies needs to decide whether to lease a small, medium, or large new retail outlet. She estimates that monthly profits will vary with demand for her cookies as follows: If she feels there is a 30 percent chance that demand will be high, what are the expected monthly profits for the outlet she will decide to lease?