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Exam 4: Decision Analysis

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Question 31

True/False

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Circular nodes in a decision tree indicate that it would be incorrect to choose a path from the node.

A) True
B) False

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Question 32

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A payoff

A) is always measured in profit.
B) is always measured in cost.
C) exists for each pair of decision alternative and state of nature.
D) exists for each state of nature.

E) A) and B)
F) C) and D)

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Question 33

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Dollar Department Stores has received an offer from Harris Diamonds to purchase Dollar's store on Grove Street for $120,000.Dollar has determined probability estimates of the store's future profitability,based on economic outcomes,as: P($80,000)= .2,P($100,000)= .3,P($120,000)= .1,and P($140,000)= .4. a.Should Dollar sell the store on Grove Street? b.What is the EVPI? c.Dollar can have an economic forecast performed,costing $10,000,that produces indicators I₁ and I₂,for which P(I_{1SYMBOL 189 \f "Symbol"}80,000)= .1;P(I_{1SYMBOL 189 \f "Symbol"}100,000)= .2;P(I_{1SYMBOL 189 \f "Symbol"}120,000)= .6;P(I_{1SYMBOL 189 \f "Symbol"}140,000)= .3.Should Dollar purchase the forecast?

The expected value approach is more appropriate for a one-time decision than a repetitive decision.

For a maximization problem,the optimistic approach is often referred to as the

A payoff table is given as a.What decision should be made by the optimistic decision maker? b.What decision should be made by the conservative decision maker? c.What decision should be made under minimax regret? d.If the probabilities of s₁,s₂,and s₃ are .2,.4,and .4,respectively,then what decision should be made under expected value? e.What is the EVPI?

EVPI is always greater than or equal to EVSI.

A decision maker has developed the following decision tree.How sensitive is the choice between N and P to the probabilities of states of nature U and V? Topic: Sensitivity analysis