ch9

1. States of nature are alternatives available to a decision maker.

True False
2. In decision analysis, states of nature refer to possible future conditions.
True False
3. Prior probabilities refer to the relative likelihood of possible states of nature.
True False
4. Payoffs always represent profits in decision analysis problems.
True False
5. A decision tree branches out all of the possible decisions and all of the possible events.
True False
6. An advantage of payoff tables compared to decision trees is that they permit us to analyze situations
involving sequential decisions.
True False
7. Payoff tables may include only non-negative numbers.
True False
8. A event node in a decision tree indicates that a decision needs to be made at that point.
True False
9. The maximax approach is an optimistic strategy.
True False
10. An example of maximax decision making is a person buying lottery tickets in hopes of a very big
payoff.
True False
11. The maximin approach involves choosing the alternative with the highest payoff.
True False
12. The maximin criterion is an optimistic criterion.
True False
13. The maximin approach involves choosing the alternative that has the "best worst" payoff.
True False
14. The maximum likelihood criterion says to focus on the largest payoff.
True False
15. The maximum likelihood criterion ignores the payoffs for states of nature other than the most likely
one.
True False
16. The equally likely criterion assigns a probability of 0.5 to each state of nature.
True False
17. Bayes' decision rule says to choose the alternative with the largest expected payoff.
True False
18. Using Bayes' decision rule will always lead to larger payoffs.
True False
19. Sensitivity analysis may be useful in decision analysis since prior probabilities may be inaccurate.
True False
20. Graphical analysis can only be used in sensitivity analysis for those problems that have two decision
alternatives.
True False
21. The EVPI indicates an upper limit in the amount a decision-maker should be willing to spend to obtain
information.
True False
22. A posterior probability is a revised probability of a state of nature after doing a test or survey to refine the
prior probability.
True False
23. Bayes' theorem is a formula for determining prior probabilities of a state of nature.
True False
24. The Sensit Plot tool is useful for examining the impact of changes in several data values at once.
True False
25. The Sensit Spider graph is useful for examining the impact of changes in several data values at once.
True False
26. An advantage of Sensit's Spider graph when compared to Sensit's Tornado chart is that it allows data
values to be varied by different percentages.
True False
27. A risk seeker has a decreasing marginal utility for money.
True False
28. Utilities can be useful when monetary values do not accurately reflect the true values of an outcome.
True False
29. Most people occupy a middle ground and are classified as risk neutral.
True False
30. A utility function for money can be constructed by applying a lottery procedure.
True False
31. The exponential utility function assumes a constant aversion to risk.
True False
32. Two people who face the same problem and use the same decision-making methodology must always
arrive at the same decision.
True False
33. Which of the following is not a criterion for decision making?
A. EVPI.
B. Maximin.
C. Maximax.
D. Bayes' decision rule.
E. Maximum likelihood.
34. Which one of the following statements is not correct when making decisions?
A. The sum of the state of nature probabilities must be 1.
B. Every probability must be greater than or equal to 0.
C. All probabilities are assumed to be equal.
D. Probabilities are used to compute expected values.
E. Perfect information assumes that the state of nature that will actually occur is known.
35. Testing how a problem solution reacts to changes in one or more of the model parameters is called:
A. analysis of tradeoffs.
B. sensitivity analysis.
C. priority recognition.
D. analysis of variance.
E. decision analysis.
36. Determining the worst payoff for each alternative and choosing the alternative with the "best worst" is the
criterion called:
A. minimin.
B. maximin.
C. maximax.
D. maximum likelihood.
E. Bayes decision rule.
37. The maximin criterion refers to:
A. minimizing the maximum return.
B. maximizing the minimum return.
C. choosing the alternative with the highest payoff.
D. choosing the alternative with the minimum payoff.
E. None of these.

38. The maximax strategy is:

A. Buy.
B. Rent.
C. Lease.
D. High.
E. Low.
39. The maximin strategy is:
A. Buy.
B. Rent.
C. Lease.
D. High.
E. Low.
40. The maximum likelihood strategy is:
A. Buy.
B. Rent.
C. Lease.
D. High.
E. Low.
41. The Bayes' decision rule strategy is:
A. Buy.
B. Rent.
C. Lease.
D. High.
E. Low.
42. The expected value of perfect information is:
A. 12.
B. 55.
C. 57.
D. 69.
E. 90.

43. The maximax strategy is:

A. small.
B. medium.
C. medium large.
D. large.
E. extra large.
44. The maximin strategy is:
A. small.
B. medium.
C. medium large.
D. large.
E. extra large.
45. The maximum likelihood strategy is:
A. small.
B. medium.
C. medium large.
D. large.
E. extra large.
46. The Bayes' decision rule strategy is:
A. small.
B. medium.
C. medium large.
D. large.
E. extra large.
47. The expected value of perfect information is:
A. 4.5.
B. 9.
C. 40.5.
D. 49.5.
E. 60.
48. The maximax strategy is:
A. A.
B. B.
C. C.
D. D.
E. E.
49. The maximin strategy is:
A. A.
B. B.
C. C.
D. D.
E. E.
50. The maximum likelihood strategy is:
A. A.
B. B.
C. C.
D. D.
E. E.
51. The Bayes' decision rule strategy is:
A. A.
B. B.
C. C.
D. D.
E. E.
52. The expected value of perfect information is:
A. -28.
B. 0.
C. 10.5.
D. 19.
E. 23.
The operations manager for a local bus company wants to decide whether he should purchase a small,
medium, or large new bus for his company. He estimates that the annual profits (in $000) will vary
depending upon whether passenger demand is low, moderate, or high, as follows.

53. If he uses the maximum likelihood criterion, which size bus will he decide to purchase?
A. Small.
B. Medium.
C. Large.
D. Either small or medium.
E. Either medium or large.
54. If he uses Bayes' decision rule, which size bus will he decide to purchase?
A. Small.
B. Medium.
C. Large.
D. Either small or medium.
E. Either medium or large.
55. What is the expected annual profit for the bus that he will decide to purchase using Bayes' decision rule?

A. $15,000.
B. $61,000.
C. $69,000.
D. $72,000.
E. $87,000.
56. What is his expected value of perfect information?
A. $15,000.
B. $61,000.
C. $69,000.
D. $72,000.
E. $87,000.
The construction manager for ABC Construction 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:

57. If he uses the maximum likelihood criterion, which kind of dwellings will he decide to build?
A. Single family.
B. Apartments.
C. Condos.
D. Either single family or apartments.
E. Either apartments or condos.
58. If he uses Bayes' decision rule, which kind of dwellings will he decide to build?
A. Single family.
B. Apartments.
C. Condos.
D. Either single family or apartments.
E. Either apartments or condos.
59. What is the expected annual profit for the dwellings that he will decide to build using Bayes' decision
rule?
A. $187,000.
B. $132,000.
C. $123,000.
D. $65,000.
E. $55,000.
60. What is his expected value of perfect information?
A. $187,000.
B. $132,000.
C. $123,000.
D. $65,000.
E. $55,000.
The head of operations for a movie studio wants to determine which of two new scripts they should select
for their next major production. She feels that script #1 has a 70% chance of earning $100 million over
the long run, but a 30% chance of losing $20 million. If this movie is successful, then a sequel could also
be produced, with an 80% chance of earning $50 million, but a 20% chance of losing $10 million. On the
other hand, she feels that script #2 has a 60% chance of earning $120 million, but a 40% chance of losing
$30 million. If successful, its sequel would have a 50% chance of earning $80 million and a 50% chance
of losing $40 million. As with the first script, if the original movie is a "flop", then no sequel would be
produced.
61. What would be the total payoff is script #1 were a success, but its sequel were not?
A. $150 million.
B. $100 million.
C. $90 million.
D. $50 million.
E. $-10 million.
62. What is the probability that script #1 will be a success, but its sequel will not?
A. 0.8.
B. 0.7.
C. 0.56.
D. 0.2.
E. 0.14.
63. What is the expected payoff from selecting script #1?
A. $150 million.
B. $90.6 million.
C. $84 million.
D. $72 million.
E. $60 million.
64. What is the expected payoff from selecting script #2?
A. $150 million.
B. $90.6 million.
C. $84 million.
D. $72 million.
E. $60 million.
65. What is the expected payoff for the optimum decision alternative?
A. $150 million.
B. $90.6 million.
C. $84 million.
D. $72 million.
E. $60 million.
Two professors at a nearby university want to co-author a new textbook in either economics or statistics.
They feel that if they write an economics book they have a 50% chance of placing it with a major
publisher where it should ultimately sell about 40,000 copies. If they can't get a major publisher to take it,
then they feel they have an 80% chance of placing it with a smaller publisher, with sales of 30,000 copies.
On the other hand if they write a statistics book, they feel they have a 40% chance of placing it with a
major publisher, and it should result in ultimate sales of about 50,000 copies. If they can't get a major
publisher to take it, they feel they have a 50% chance of placing it with a smaller publisher, with ultimate
sales of 35,000 copies.
66. What is the probability that the economics book would wind up being placed with a smaller publisher?

A. 0.8.
B. 0.5.
C. 0.4.
D. 0.2.
E. 0.1.
67. What is the probability that the statistics book would wind up being placed with a smaller publisher?
A. 0.6.
B. 0.5.
C. 0.4.
D. 0.3.
E. 0.
68. What is the expected payoff for the decision to write the economics book?
A. 50,000 copies.
B. 40,000 copies.
C. 32,000 copies.
D. 30,500 copies.
E. 10,500 copies.
69. What is the expected payoff for the decision to write the statistics book?
A. 50,000 copies.
B. 40,000 copies.
C. 32,000 copies.
D. 30,500 copies.
E. 10,500 copies.
70. What is the expected payoff for the optimum decision alternative?
A. 50,000 copies.
B. 40,000 copies.
C. 32,000 copies.
D. 30,500 copies.
E. 10,500 copies.

There is an option of paying $100 to have research done to better predict which state of nature will occur.
When the true state of nature is S1, the research will accurately predict S1 60% of the time. When the true
state of nature is S2, the research will accurately predict S2 80% of the time.
71. Given that the research is not done, what is the expected payoff using Bayes' decision rule?
A. 0.
B. 29.
C. 40.
D. 75.
E. 100.
72. What is the expected value of perfect information?
A. 40.
B. 45.
C. 75.
D. 85.
E. 100.
73. Given that the research is done, what is the joint probability that the state of nature is S1 and the research
predicts S1?
A. 0.08.
B. 0.16.
C. 0.24.
D. 0.32.
E. 0.36.
74. Given that the research is done, what is the joint probability that the state of nature is S1 and the research
predicts S2?
A. 0.08.
B. 0.16.
C. 0.24.
D. 0.32.
E. 0.36.
75. Given that the research is done, what is the joint probability that the state of nature is S2 and the research
predicts S1?
A. 0.08.
B. 0.16.
C. 0.24.
D. 0.32.
E. 0.36.
76. Given that the research is done, what is the joint probability that the state of nature is S2 and the research
predicts S2?
A. 0.08.
B. 0.16.
C. 0.24.
D. 0.32.
E. 0.36.
77. What is the unconditional probability that the research predicts S1?
A. 0.32.
B. 0.4.
C. 0.44.
D. 0.56.
E. 0.6.
78. What is the unconditional probability that the research predicts S2?
A. 0.32.
B. 0.4.
C. 0.44.
D. 0.56.
E. 0.6.
79. What is the posterior probability of S1 given that the research predicts S1?
A. 0.18.
B. 0.44.
C. 0.57.
D. 0.65.
E. 0.82.
80. What is the posterior probability of S2 given that the research predicts S2?
A. 0.18.
B. 0.44.
C. 0.57.
D. 0.65.
E. 0.82.
81. Given that the research is done, what is the expected payoff using Bayes' decision rule?
A. -82.
B. -44.
C. 0.
D. 29.
E. 40.
ch9 Key
1. FALSE

2. TRUE

3. TRUE

4. FALSE

5. TRUE

6. FALSE

7. FALSE

8. FALSE

9. TRUE

10. TRUE

11. FALSE

12. FALSE

13. TRUE

14. FALSE

15. TRUE

16. FALSE

17. TRUE

18. FALSE

19. TRUE

20. FALSE

21. TRUE

22. TRUE

23. FALSE

24. FALSE

25. TRUE

26. FALSE

27. FALSE

28. TRUE

29. FALSE

30. TRUE

31. TRUE

32. FALSE

33. A

34. C

35. B

36. B
37. B

38. A

39. C

40. C

41. C

42. A

43. E

44. D

45. C

46. C

47. B

48. E

49. C

50. C

51. B

52. C

53. C

54. B

55. D

56. A

57. B

58. A

59. B

60. E

61. C

62. E

63. B

64. D

65. B

66. C

67. D

68. C

69. D

70. C

71. C

72. B

73. E

74. C
75. A

76. D

77. C

78. D

79. E

80. C

81. B
ch9 Summary
Category # of Questions
Hillier - Chapter 009 89