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Exam 21: Decision-Making Tools

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Question 41

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Earl Shell owns his own Sno-Cone business and lives 30 miles from a beach resort.The sale of Sno-Cones is highly dependent upon his location and upon the weather.At the resort,he will profit $110 per day in fair weather,$20 per day in foul weather.At home,he will profit $70 in fair weather,$50 in foul weather.Assume that on any particular day,the weather service suggests a 60% chance of fair weather. a.Construct Earl's payoff table. b.What decision is recommended by the expected value criterion? c.What is the EVPI?

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(a)The payoff table is
(b)the EMV for ...

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Question 42

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Which of the following is not considered a step in the decision-making process?

A) Clearly identify the problem.
B) Select the best alternative.
C) Develop objectives.
D) Evaluate alternatives.
E) Minimize costs whenever possible.

F) A) and E)
G) A) and B)

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Question 43

Multiple Choice

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

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

A retailer is deciding how many 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.The largest conditional value (profit) in the entire payoff table for this scenario is

A decision-maker using the maximin criterion on the problem below would choose Alternative ________ because the maximum of the row minimums is ________.

A decision tree is a(n)

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?

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

Define expected monetary value (EMV).

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

What are decision tables?

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

What limitation(s)do decision trees overcome compared to decision tables?

Decision trees and decision tables can both solve problems requiring a single decision,but decision tables are the preferred method when a sequence of decisions is involved.

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: 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.

Daily sales of bread by Salvador Monella's Baking Company follow the historical pattern shown in the table below.It costs the bakery 50 cents to produce a loaf of bread,which sells for 95 cents.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?

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 dollar 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?

Decision trees

How is the expected value of perfect information (EVPI)found?