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1) A state of nature is an actual event that may occur in the future.
2) A payoff table is a means of organizing a decision situation, including the payoffs from different decisions given the various states of nature.
3) The maximax criterion results in the maximum of the maximum payoffs.
4) The maximin approach involves choosing the alternative with the highest payoff.
5) Regret is the difference between the payoff from the best decision and all other decision payoffs.
6) The minimax regret criterion minimizes the maximum regret.
7) The minimax regret criterion maximizes the maximum regret.
8) The Hurwicz criterion is a compromise between the maximax and maximin criteria.:
9) The Hurwicz criterion is a compromise between the minimax and minimin criteria.
10) The coefficient of optimism is a measure of the decision maker’s optimism.
11) The Hurwicz criterion multiplies the best payoff by the coefficient of optimism.
12) The Hurwicz criterion multiplies the worst payoff by the coefficient of optimism.
13) A dominant decision is one that has better payoff than another decision under each state of nature.
14) The appropriate criterion is dependent on the risk personality and philosophy of the decision maker.
15) The maximax criterion is optimistic.
16) The maximin criterion maximizes the minimum regret.
17) The minimax criterion minimizes the maximum payoff.
18) Regret and opportunity loss mean the same thing.
19) The equal likelihood criterion assigns a probability of 0.5 to each state of nature.
20) Expected opportunity loss is the expected value of the regret for each decision.
21) When using decision trees, branches with the greatest expected value are selected.
22) A decision tree is a diagram consisting of circles decision nodes, square probability nodes, and branches.
23) When the __________ criterion is used, the maximum of the maximum payoffs is observed.
24) When the __________ criterion is used, the maximum of the minimum payoffs is observed
25) __________ is the difference between the payoff from the best decision and all other decision payoffs.
26) The __________ is a compromise between the maximax and the maximin criterion. Answer: Hurwicz criterion
27) The __________ is a measure of the decision makers optimism.
28) A(n) __________ decision is one that has a better payoff than another decision under the state of nature.
29) A __________ structures decisions with series of nodes.
30) The __________ of sample information is the ratio of the expected value of sample information to the expected value of perfect information.
31) When the __________ criterion is used, the decision maker selects the decision alternative that minimizes the maximum regret.
32) A ________ decision tree illustrates a situation requiring a services of decisions.
33) ________ is a measure of personal satisfaction derived from money.
34) People who forgo a high expected value to avoid a disaster with a low probability are __________.
Pearson Education, Inc. Publishing as Prentice Hall A group of friends are planning a recreational outing and have constructed the following payoff table to help them decide which activity to engage in. Assume that the payoffs represent their level of enjoyment for each activity under the various weather conditions. Weather Cold Warm Rainy S1 S2 S3 Bike: A1 10 8 6 Hike: A2 14 15 2 Fish: A3 7 8 9
35) If the group is optimistic, what decision should they make?
36) If the group is conservative, what decision will they make?
37) If the group chooses to minimize their maximum regret, what activity will they choose?
38) If the probabilities of cold weather (S1), warm weather (S2), and rainy weather (S3) are 0.2, 0.4, and 0.4, respectively, then what decision should be made using the expected value criterion?
39) What is the EVPI for this situation?
Pearson Education, Inc. Publishing as Prentice Hall An investor is consider 4 different opportunities, A, B, C, or D. The payoff for each opportunity will depend on the economic conditions, represented in the payoff table below. Poor Investment (S1) A 50 B 80 C -100 D 25 Economic Condition Average Good Excellent (S2) (S3) (S4) 75 20 30 15 40 50 300 -50 10 25 25 25
40) What decision would be made under maximax?
41) What decision would be made under maximin?
42) What decision would be made under minimax regret?
43) If the probabilities of each economic condition are 0.5, 0.1, 0.35, and 0.05 respectively, what investment would be made using the expected value criterion?
44) What is the expected value of perfect information?
Pearson Education, Inc. Publishing as Prentice Hall A manager has developed a payoff table that indicates the profits associated with a set of alternatives under 2 possible states of nature. Alt 1 2 3 S1 10 -2 8 S2 2 8 5 45) If the manager uses maximin as the decision criterion, which of the alternatives should she choose?
46) If the manager uses minimax regret as the decision criterion, which of the alternatives would she choose?
47) use the expected value criterion to select the best alternative. Assume that the probability of S2 is equal to 0.4.
48) Compute the expected value of perfect information assuming that the probability of S2 is equal to 0.4.
Pearson Education, Inc. Publishing as Prentice Hall The local operations manager for the IRS must decide whether to hire 1, 2, or 3 temporary workers. He estimates that net revenues will vary with how well taxpayers comply with the new tax code.
49) If he uses the maximin criterion, how many new workers will he hire?
50) If he uses the minimax regret criterion, how many new workers will he hire?