1.

Linear Programming: Objective and Assumptions

Q1. The primary objective of linear programming is to:

a) Minimize costs or maximize profits

b) Ensure balanced constraints
c) Solve quadratic equations
d) Eliminate redundant constraints
Answer: a) Minimize costs or maximize profits
Analysis: Linear programming focuses on optimizing a single measurable goal, such as profit
maximization or cost minimization, subject to constraints.

Q2. Linear programming assumes:

a) Certainty in coefficients of the objective function and constraints

b) Non-linearity of variables
c) Constant resource availability
d) Unlimited variables
Answer: a) Certainty in coefficients of the objective function and constraints
Analysis: Certainty ensures that all parameters, such as costs, profits, and resources, are
known and constant throughout the analysis.

Q3. Which of the following is NOT an assumption of linear programming?

a) Non-negativity of decision variables

b) Linear relationships between variables
c) Unlimited resources
d) Additivity in constraints
Answer: c) Unlimited resources
Analysis: Resources are always limited in real-world applications, which forms the basis of
linear programming problems.

Q4. What is the primary assumption about the constraints in linear programming?

a) They must be non-linear equations

b) They represent proportional relationships
c) They can be ignored in some cases
d) They should always have integer values
Answer: b) They represent proportional relationships
Analysis: Constraints in linear programming are based on linear relationships, meaning
changes in variables affect the system proportionally.
Q5. Proportionality in linear programming means:

a) Variables can have negative values

b) A unit increase in a variable changes the objective function proportionally
c) Constraints can be quadratic
d) The problem has multiple solutions
Answer: b) A unit increase in a variable changes the objective function proportionally
Analysis: Proportionality is critical in linear programming as it ensures that the effect of each
variable is linear and constant.

2. Formulation of Linear Programming Problems

Q6. A linear programming problem must have:

a) At least one constraint and one objective function

b) Only equality constraints
c) Infinite decision variables
d) Random coefficients in constraints
Answer: a) At least one constraint and one objective function
Analysis: A valid linear programming model requires an objective function to optimize and
constraints to limit the solution space.

Q7. Which of the following is true for decision variables?

a) They represent resources available in abundance.

b) They are quantities to be determined to achieve the optimal solution.
c) They always take negative values.
d) They are part of the constraints only.
Answer: b) They are quantities to be determined to achieve the optimal solution.
Analysis: Decision variables represent the unknowns in the problem, and their values are
determined to optimize the objective function.

Q8. What is the significance of non-negativity constraints in linear programming?

a) They make the problem more complicated.

b) They ensure variables represent realistic quantities like resources or products.
c) They restrict the solution to integer values.
d) They are not essential for most problems.
Answer: b) They ensure variables represent realistic quantities like resources or products.
Analysis: Non-negativity ensures that decision variables represent real-world quantities like
production or inventory, which cannot be negative.

Q9. The constraints in a linear programming problem:

a) Define the feasible region

b) Must always be strict inequalities
c) Are not required for optimization
d) Can take any mathematical form
Answer: a) Define the feasible region
Analysis: Constraints form the boundaries of the feasible region, within which the optimal
solution must lie.

Q10. Which of the following is NOT part of the linear programming formulation?

a) Objective function
b) Constraints
c) Non-negativity condition
d) Random variables
Answer: d) Random variables
Analysis: Linear programming assumes deterministic parameters, so randomness is not
considered in its formulation.

3. Data Envelopment Analysis (DEA)

Q11. Data Envelopment Analysis (DEA) is primarily used to:

a) Solve linear equations

b) Measure efficiency of decision-making units (DMUs)
c) Optimize inventory levels
d) Calculate resource shortages
Answer: b) Measure efficiency of decision-making units (DMUs)
Analysis: DEA evaluates the relative efficiency of similar entities (e.g., companies,
departments) by comparing their inputs and outputs using linear programming.

Q12. DEA assumes:

a) No relationship between inputs and outputs

b) A deterministic relationship between inputs and outputs
c) Unlimited inputs and outputs
d) Random selection of DMUs
Answer: b) A deterministic relationship between inputs and outputs
Analysis: DEA relies on the assumption that there is a clear and predictable relationship
between resources (inputs) and results (outputs).

Q13. In DEA, an inefficient DMU is one that:

a) Maximizes outputs while minimizing inputs

b) Falls below the efficiency frontier
c) Has no feasible solution
d) Operates at optimal efficiency
Answer: b) Falls below the efficiency frontier
Analysis: The efficiency frontier represents the best-performing DMUs; inefficient units lie
below this frontier.

4. Graphic Method

Q14. The graphical method is suitable for problems with:

a) Two or fewer decision variables

b) No constraints
c) More than three constraints
d) Non-linear objective functions
Answer: a) Two or fewer decision variables
Analysis: The graphical method involves plotting constraints and is practical only for two-
dimensional problems.

Q15. A point lying outside the feasible region:

a) Always satisfies all constraints

b) Violates at least one constraint
c) Is the optimal solution
d) Is a corner point
Answer: b) Violates at least one constraint
Analysis: Points outside the feasible region do not satisfy all the constraints and cannot be
considered feasible solutions.

Q16. What does the optimal solution in the graphical method typically lie on?
a) Within the feasible region
b) Outside the feasible region
c) At a corner point of the feasible region
d) At the midpoint of the feasible region
Answer: c) At a corner point of the feasible region
Analysis: In linear programming, the optimal solution is always found at one of the vertices
(corner points) of the feasible region.

5. Simplex Method

Q17. The simplex method starts with:

a) An infeasible solution
b) A feasible solution at one corner of the feasible region
c) The optimal solution directly
d) Random values for decision variables
Answer: b) A feasible solution at one corner of the feasible region
Analysis: The simplex method iteratively moves from one corner of the feasible region to
another to find the optimal solution.

Q18. Which of the following variables are added to constraints to convert inequalities to
equalities in the simplex method?

a) Slack and surplus variables

b) Artificial variables
c) Random variables
d) Shadow prices
Answer: a) Slack and surplus variables
Analysis: Slack variables are added to ≤ constraints, and surplus variables are subtracted
from ≥ constraints to handle inequalities.

Q19. The role of artificial variables in the simplex method is to:

a) Represent surplus resources

b) Help start the simplex procedure for constraints with equality or ≥ conditions
c) Eliminate redundant constraints
d) Calculate the dual price
Answer: b) Help start the simplex procedure for constraints with equality or ≥ conditions
Analysis: Artificial variables are introduced when constraints cannot be satisfied with slack
or surplus variables, allowing the algorithm to begin.
Q20. In the simplex method, the optimal solution is reached when:

a) All variables in the objective row are negative

b) All variables in the objective row are zero
c) All variables in the objective row are non-negative
d) No solution exists
Answer: c) All variables in the objective row are non-negative
Analysis: When the coefficients of the objective function row in the simplex tableau are non-
negative, the optimal solution has been reached.

Q21. The pivot element in the simplex method is:

a) The largest number in the pivot column

b) The smallest number in the pivot column
c) The element in the pivot row and pivot column intersection
d) The element in the last row and last column
Answer: c) The element in the pivot row and pivot column intersection
Analysis: The pivot element is the key number used to perform row operations and move
toward the optimal solution.

Q22. Which of the following is NOT true for the simplex method?

a) It uses iterative computations.

b) It works well with integer variables.
c) It is suitable for large-scale problems.
d) It starts with a basic feasible solution.
Answer: b) It works well with integer variables
Analysis: The simplex method is designed for continuous variables, and integer
programming requires separate techniques.

7. Dynamic Programming

Q23. Dynamic programming is primarily used to solve:

a) Problems with overlapping subproblems and optimal substructure

b) Problems with non-linear constraints
c) Problems with only two decision variables
d) Linear programming problems
Answer: a) Problems with overlapping subproblems and optimal substructure
Analysis: Dynamic programming breaks problems into smaller subproblems and uses their
solutions to construct the final answer efficiently.

Q24. In dynamic programming, the principle of optimality states that:

a) Sub-optimal solutions lead to optimal solutions

b) Every subproblem must be solved optimally for the overall optimal solution
c) Constraints must be non-linear
d) The problem must be solved iteratively
Answer: b) Every subproblem must be solved optimally for the overall optimal solution
Analysis: The principle of optimality ensures that the optimal solution of a problem is
composed of the optimal solutions of its subproblems.

Q25. Which of the following is a key characteristic of dynamic programming?

a) It uses random variables.

b) It solves problems using a single iteration.
c) It stores intermediate results to avoid redundant computations.
d) It focuses only on maximizing outputs.
Answer: c) It stores intermediate results to avoid redundant computations.
Analysis: This is known as memoization, a feature of dynamic programming that optimizes
problem-solving by reducing computational redundancy.

8. Transportation Problems

Q26. The transportation problem is a special type of linear programming problem where:

a) Constraints are ignored

b) The objective is to minimize transportation costs or maximize profit
c) Resources are infinite
d) Solutions are always non-linear
Answer: b) The objective is to minimize transportation costs or maximize profit
Analysis: The transportation problem optimizes costs or profits associated with transporting
goods from multiple sources to multiple destinations.

Q27. The initial solution in a transportation problem is obtained using:

a) Simplex method
b) Graphic method
c) Northwest corner method, Least cost method, or Vogel's approximation method
d) Big-M method
Answer: c) Northwest corner method, Least cost method, or Vogel's approximation
method
Analysis: These methods are used to find a feasible starting solution before optimizing.

Q28. Which of the following ensures the feasibility of the transportation problem?

a) The number of constraints equals the number of variables

b) Total supply equals total demand
c) All costs are equal
d) There are more sources than destinations
Answer: b) Total supply equals total demand
Analysis: To solve the transportation problem, the total supply must equal the total demand;
otherwise, dummy variables are added.

Q29. In a transportation problem, degeneracy occurs when:

a) The solution is infeasible

b) The number of allocations is less than (m + n − 1), where m = sources and n = destinations
c) All costs are negative
d) There is no optimal solution
Answer: b) The number of allocations is less than (m + n − 1)
Analysis: Degeneracy indicates that there are not enough allocations to test the optimality
condition.

9. Assignment Problems

Q30. An assignment problem is a special case of linear programming where:

a) All constraints are inequalities

b) All resources are unlimited
c) Each task is assigned to one worker at minimum cost
d) All decision variables are continuous
Answer: c) Each task is assigned to one worker at minimum cost
Analysis: Assignment problems focus on minimizing costs or maximizing efficiency while
ensuring one-to-one allocation.
Q31. The Hungarian method is used to solve:

a) Transportation problems
b) Dynamic programming problems
c) Assignment problems
d) Multi-objective problems
Answer: c) Assignment problems
Analysis: The Hungarian method is an algorithm designed to solve assignment problems
optimally by reducing the cost matrix.

Q32. The total cost in an assignment problem is calculated by:

a) Multiplying the supply and demand

b) Summing the costs of assigned cells
c) Using the Northwest corner method
d) Finding the average of all costs
Answer: b) Summing the costs of assigned cells
Analysis: The total cost is derived by summing the costs of all assigned tasks in the cost
matrix.

10. Miscellaneous Questions

Q33. A feasible region is defined by:

a) The objective function

b) The intersection of all constraints
c) The gradient of the objective function
d) Random values of variables
Answer: b) The intersection of all constraints
Analysis: The feasible region includes all points that satisfy every constraint.

Q34. Shadow price represents:

a) The cost of adding one more unit of a resource

b) The penalty for not meeting a constraint
c) The marginal increase in profit due to a variable
d) The total profit of the objective function
Answer: a) The cost of adding one more unit of a resource
Analysis: Shadow price measures the value of relaxing a constraint by one unit.

1. Origin of Linear Programming

Q1. Linear programming was first developed by:

a) George Dantzig in which year?
Answer: 1947
Explanation: George Dantzig introduced the simplex method in 1947 to solve linear
programming problems.

2. Development of the Simplex Method

Q2. The simplex method was proposed by George Dantzig in:

Answer: 1947
Explanation: The simplex algorithm was the first systematic method for solving linear
programming problems.

3. First Application of Linear Programming

Q3. Linear programming was first applied during:

Answer: World War II
Explanation: It was used to optimize military logistics and planning in the early 1940s.

4. Introduction of Transportation Problems

Q4. The transportation problem was first studied by:

Answer: F. L. Hitchcock in 1941
Explanation: Hitchcock introduced the "distribution of goods" concept in transportation
problems.

5. Hungarian Method for Assignment Problems

Q5. The Hungarian method for solving assignment problems was developed in:
Answer: 1955
Explanation: Harold Kuhn presented the Hungarian method based on earlier work by Kőnig
and Egerváry.

6. Dynamic Programming Origin

Q6. Dynamic programming was introduced by Richard Bellman in:
Answer: 1953
Explanation: Richard Bellman developed dynamic programming to solve optimization
problems with overlapping subproblems.

7. Invention of Data Envelopment Analysis (DEA)

Q7. Data Envelopment Analysis (DEA) was introduced by Charnes, Cooper, and Rhodes in:
Answer: 1978
Explanation: DEA was designed to evaluate the relative efficiency of decision-making units
(DMUs).

8. Duality Theory in Linear Programming

Q8. The theory of duality in linear programming was developed by:

Answer: John von Neumann in the 1940s
Explanation: Duality provides an alternative way of interpreting LP solutions.

9. Development of Integer Programming

Q9. Integer programming as a specialized field emerged in:

Answer: 1950s
Explanation: Integer programming became a significant extension of linear programming in
operations research.

10. First Use of Linear Programming in Industry

Q10. The first industrial application of linear programming was in:

Answer: 1951
Explanation: It was used in petroleum refining to optimize blending problems.

11. Graphical Method Milestone

Q11. The graphical method for solving two-variable linear programming problems was
introduced in:
Answer: 1950s
Explanation: This method visualizes constraints and the feasible region for small-scale
problems.
12. Transportation Algorithm Evolution

Q12. The MODI (Modified Distribution) method for solving transportation problems was
introduced in:
Answer: 1954
Explanation: MODI is an efficient optimization approach for transportation problems.

13. Quadratic Programming Introduction

Q13. Quadratic programming was first formulated in:

Answer: 1959
Explanation: This approach extended linear programming to include quadratic objective
functions.

14. Linear Programming Nobel Prize Recognition

Q14. The Nobel Prize for contributions to linear programming and game theory was awarded
to John Nash in:
Answer: 1994
Explanation: John Nash's work on equilibrium theory significantly impacted optimization
and operations research.

15. Computational Breakthrough in LP

Q15. The Karmarkar algorithm, an interior-point method for linear programming, was
introduced in:
Answer: 1984
Explanation: Narendra Karmarkar developed this algorithm, offering an alternative to the
simplex method.

16. Early Applications of DEA in Banking

Q16. Data Envelopment Analysis was first applied in the banking sector in:
Answer: 1980s
Explanation: It was used to measure the efficiency of banking branches.

1. Costs in Inventory Management

Q1. Which of the following is NOT an inventory-related cost?
a) Ordering cost
b) Holding cost
c) Shortage cost
d) Sunk cost
Answer: d) Sunk cost
Analysis: Sunk costs are historical expenses that cannot be recovered, whereas inventory-
related costs are ongoing and linked to procurement, storage, and stockouts.

Q2. Holding costs in inventory management typically include:

a) Rent, insurance, and obsolescence costs
b) Purchase price of inventory
c) Ordering costs
d) Supplier penalties
Answer: a) Rent, insurance, and obsolescence costs
Analysis: Holding costs cover expenses related to storing and maintaining inventory.

Q3. Ordering cost is incurred:

a) Each time an order is placed
b) Only for large orders
c) When inventory is damaged
d) Only during peak seasons
Answer: a) Each time an order is placed
Analysis: Ordering cost includes administrative and logistics expenses for placing an order.

2. Types of Inventory

Q4. Which of the following is NOT a type of inventory?

a) Raw materials
b) Finished goods
c) Work-in-progress
d) Depreciated assets
Answer: d) Depreciated assets
Analysis: Inventory refers to resources used in production or held for sale, whereas
depreciated assets are unrelated to inventory.

Q5. Safety stock is used to:

a) Increase production
b) Minimize the risk of stockouts
c) Maximize profits
d) Reduce storage costs
Answer: b) Minimize the risk of stockouts
Analysis: Safety stock acts as a buffer to account for variability in demand and supply.

3. Economic Order Quantity (EOQ)

Q6. The EOQ model assumes:

a) Demand is constant and predictable
b) Shortages are allowed
c) Costs are random
d) Inventory levels fluctuate unpredictably
Answer: a) Demand is constant and predictable
Analysis: EOQ is based on steady demand and known costs to minimize total inventory
costs.

Q7. In the EOQ formula, the term (2DS/H)\sqrt{(2DS/H)}(2DS/H) represents:

a) Total cost
b) Optimal order quantity
c) Demand variability
d) Holding cost
Answer: b) Optimal order quantity
Analysis: This formula determines the order size that minimizes total ordering and holding
costs.

Q8. In EOQ, as ordering cost increases:

a) EOQ increases
b) EOQ decreases
c) EOQ remains constant
d) EOQ becomes zero
Answer: a) EOQ increases
Analysis: Higher ordering costs lead to fewer, larger orders, increasing EOQ.

4. Continuous and Periodic Review Systems

Q9. A continuous review (Q) system triggers replenishment when:

a) A fixed time interval passes
b) Inventory reaches the reorder point
c) Demand decreases
d) Stock is excessive
Answer: b) Inventory reaches the reorder point
Analysis: A continuous review system continuously monitors inventory levels and reorders
when stock falls to the reorder point.

Q10. A periodic review (P) system reviews inventory:

a) Continuously
b) At regular time intervals
c) Only when stockouts occur
d) Based on random checks
Answer: b) At regular time intervals
Analysis: The P system checks inventory periodically and replenishes stock to a predefined
level.

Q11. Which system is better suited for high-value inventory?

a) Continuous review (Q) system
b) Periodic review (P) system
c) Hybrid system
d) Random review system
Answer: a) Continuous review (Q) system
Analysis: The Q system ensures tighter control, making it ideal for high-value items.

5. Hybrid Inventory System

Q12. A hybrid inventory system combines:

a) Forecasting and inventory planning
b) Continuous and periodic review systems
c) Holding and shortage costs
d) Inventory turnover and demand analysis
Answer: b) Continuous and periodic review systems
Analysis: Hybrid systems use the strengths of both Q and P systems for flexibility.

II. Waiting Line Models

1. Characteristics of Waiting Line Systems

Q13. In a waiting line model, the average number of arrivals is described by:
a) Service rate (μ\muμ)
b) Arrival rate (λ\lambdaλ)
c) Queue length
d) Waiting cost
Answer: b) Arrival rate (λ\lambdaλ)
Analysis: Arrival rate (λ\lambdaλ) is the average number of customers arriving per time unit.

Q14. The service rate (μ\muμ) represents:

a) The number of servers
b) The average time a customer spends waiting
c) The average number of customers served per time unit
d) The queue discipline
Answer: c) The average number of customers served per time unit
Analysis: The service rate defines how quickly a server can handle customers.

2. Single-Channel and Multiple-Channel Models

Q15. A single-channel waiting line has:

a) One server
b) Multiple servers
c) Unlimited customers
d) No queue
Answer: a) One server
Analysis: Single-channel systems involve one server attending to customers in the queue.

Q16. In a multiple-channel model:

a) Only one customer is served at a time
b) There are multiple servers handling customers
c) The queue length is fixed
d) Customers are served randomly
Answer: b) There are multiple servers handling customers
Analysis: Multiple-channel systems involve parallel servers working simultaneously.

3. Constant-Service Time Model

Q17. The constant-service time model assumes:

a) Variable service times
b) Service times are fixed
c) Random arrivals
d) Infinite population
Answer: b) Service times are fixed
Analysis: Service time remains constant in this model, simplifying calculations.

4. Sequencing Models

Q18. Sequencing models aim to:

a) Minimize total processing time
b) Maximize waiting time
c) Randomize tasks
d) Ignore task order
Answer: a) Minimize total processing time
Analysis: Sequencing models optimize task order to reduce processing and waiting times.

5. Replacement Models

Q19. Replacement models are used to determine:

a) When to replace equipment
b) Optimal inventory levels
c) Queue lengths
d) Customer service times
Answer: a) When to replace equipment
Analysis: Replacement models evaluate the trade-off between maintenance costs and
replacement costs.

Q20. A replacement policy based on "group replacement" is effective when:

a) Individual replacement is too costly
b) Equipment failures are independent
c) Items are inexpensive
d) Failures are rare
Answer: a) Individual replacement is too costly
Analysis: Group replacement reduces costs by replacing all items together at scheduled
intervals.

Inventory Control Models

Q21. The total cost in an inventory management system is the sum of:
a) Ordering and transportation costs
b) Holding and shortage costs
c) Ordering and holding costs
d) Demand and safety stock costs
Answer: c) Ordering and holding costs
Analysis: Total inventory cost balances ordering costs (incurred by placing orders) and
holding costs (incurred by storing inventory).

Q22. The reorder point in inventory management is determined by:

a) The EOQ formula
b) Lead time and demand
c) Holding and shortage costs
d) Total inventory cost
Answer: b) Lead time and demand
Analysis: The reorder point ensures inventory replenishment before stockouts, based on
expected demand during lead time.

Q23. Inventory turnover ratio measures:

a) How quickly inventory is replenished
b) How often inventory is sold and replaced
c) The cost of inventory stored
d) The total inventory holding costs
Answer: b) How often inventory is sold and replaced
Analysis: Inventory turnover ratio indicates the efficiency of inventory management and
sales.

Q24. Which inventory control system uses a fixed order quantity and continuous
monitoring?
a) Economic Order Quantity (EOQ)
b) Periodic Review (P) system
c) Continuous Review (Q) system
d) Hybrid system
Answer: c) Continuous Review (Q) system
Analysis: Continuous review systems monitor inventory levels and trigger orders when they
reach the reorder point.

Q25. The safety stock in an inventory system is primarily used to:

a) Reduce holding costs
b) Increase lead time
c) Address demand variability
d) Maximize EOQ
Answer: c) Address demand variability
Analysis: Safety stock acts as a buffer against unpredictable demand or supply delays.

Waiting Line Models

Q26. In queuing theory, the "queue discipline" refers to:

a) The arrival rate of customers
b) The order in which customers are served
c) The number of servers
d) The service rate of the system
Answer: b) The order in which customers are served
Analysis: Queue discipline determines the priority of customer service, such as FIFO (First In,
First Out).

Q27. Little’s Law in waiting line models relates to:

a) Inventory levels and lead times
b) Queue length, arrival rate, and waiting time
c) Ordering cost and service rate
d) Customer satisfaction and service quality
Answer: b) Queue length, arrival rate, and waiting time
Analysis: Little's Law states that L=λ×WL = \lambda \times WL=λ×W, where LLL is the
average number of customers in the system, λ\lambdaλ is the arrival rate, and WWW is the
average waiting time.

Q28. The service utilization factor (ρ\rhoρ) in queuing theory is defined as:
a) ρ=λ/μ\rho = \lambda / \muρ=λ/μ
b) ρ=μ/λ\rho = \mu / \lambdaρ=μ/λ
c) ρ=L/W\rho = L / Wρ=L/W
d) ρ=W/L\rho = W / Lρ=W/L
Answer: a) ρ=λ/μ\rho = \lambda / \muρ=λ/μ
Analysis: The utilization factor measures the proportion of time the server is busy.
Q29. In a finite population waiting line model:
a) The number of customers is limited
b) The queue length is infinite
c) The arrival rate is constant
d) Customers are served randomly
Answer: a) The number of customers is limited
Analysis: Finite population models restrict the number of customers that can join the
system.

Q30. The constant-service time model is most applicable when:

a) Service times vary greatly
b) Service times are predictable and fixed
c) Arrival rates are constant
d) Servers operate in batches
Answer: b) Service times are predictable and fixed
Analysis: This model is ideal for systems where each customer receives the same amount of
service time.

Decision Making Under Risk and Uncertainty

Q1. Decision-making under risk involves:

a) No knowledge of outcomes
b) Complete certainty of outcomes
c) Known probabilities of outcomes
d) No probabilities or outcomes
Answer: c) Known probabilities of outcomes
Analysis: In decision-making under risk, the decision-maker has information about the
likelihood of each outcome.

Q2. Decision-making under uncertainty implies:

a) Known probabilities of outcomes
b) The absence of any probabilistic information about outcomes
c) Risk-free decisions
d) Perfect information is available
Answer: b) The absence of any probabilistic information about outcomes
Analysis: Under uncertainty, the decision-maker cannot assign probabilities to outcomes,
making decisions more complex.
Q3. Which type of decision-making assumes complete knowledge of future events?
a) Decision-making under risk
b) Decision-making under certainty
c) Decision-making under uncertainty
d) None of the above
Answer: b) Decision-making under certainty
Analysis: Decision-making under certainty assumes that the decision-maker knows the
outcome of every decision.

II. Decision Problem

Q4. A decision problem typically involves:

a) Alternatives, states of nature, and payoffs
b) Only states of nature
c) Only payoffs
d) Random events
Answer: a) Alternatives, states of nature, and payoffs
Analysis: Decision problems are characterized by multiple courses of action, uncertain
conditions, and associated rewards or losses.

Q5. The states of nature in a decision problem represent:

a) Actions available to the decision-maker
b) Uncontrollable future events
c) Profits from a decision
d) All possible outcomes
Answer: b) Uncontrollable future events
Analysis: States of nature are external factors beyond the decision-maker’s control.

III. Maximax Criterion

Q6. The Maximax Criterion is most suitable for:

a) Risk-averse decision-makers
b) Optimistic decision-makers
c) Conservative decision-makers
d) Uncertainty avoiders
Answer: b) Optimistic decision-makers
Analysis: Maximax focuses on selecting the decision with the maximum possible payoff,
catering to those willing to take risks.

Q7. The Maximax Criterion identifies the decision:

a) With the least regret
b) With the maximum minimum payoff
c) With the highest possible payoff across alternatives
d) That minimizes the chance of loss
Answer: c) With the highest possible payoff across alternatives
Analysis: It is an optimistic approach that seeks the best-case scenario.

IV. Maximin Criterion

Q8. The Maximin Criterion is ideal for decision-makers who are:

a) Optimistic
b) Risk-neutral
c) Risk-averse
d) Risk-loving
Answer: c) Risk-averse
Analysis: Maximin chooses the decision with the best worst-case scenario, making it suitable
for cautious individuals.

Q9. The Maximin Criterion selects the decision:

a) With the maximum payoff in the best state of nature
b) With the maximum of the minimum payoffs
c) With the minimum regret
d) That balances risk and reward
Answer: b) With the maximum of the minimum payoffs
Analysis: This conservative criterion ensures that the decision-maker avoids the worst
possible outcome.

V. Minimax Regret Criterion

Q10. The Minimax Regret Criterion aims to:

a) Minimize the maximum regret for a decision
b) Maximize the minimum regret for a decision
c) Avoid risk entirely
d) Maximize expected payoffs
Answer: a) Minimize the maximum regret for a decision
Analysis: It is used to minimize the potential for regret if a better choice could have been
made.

Q11. Regret in decision-making is:

a) The difference between the best and actual payoff for a state of nature
b) The maximum payoff across alternatives
c) The minimum payoff under uncertainty
d) The expected value of a decision
Answer: a) The difference between the best and actual payoff for a state of nature
Analysis: Regret measures the opportunity cost of not selecting the optimal decision.

VI. Laplace Criterion

Q12. The Laplace Criterion assumes:

a) All states of nature are equally likely
b) Probabilities are assigned to states of nature
c) Decisions depend on the worst-case scenario
d) Risk is ignored completely
Answer: a) All states of nature are equally likely
Analysis: The Laplace Criterion is used when there is no information about probabilities and
assumes equal likelihood for all outcomes.

Q13. Under the Laplace Criterion, the decision-maker chooses the:

a) Alternative with the maximum regret
b) Alternative with the highest expected payoff
c) Alternative with the lowest minimum payoff
d) Alternative with the maximum probability
Answer: b) Alternative with the highest expected payoff
Analysis: The Laplace Criterion averages the payoffs across states of nature and selects the
maximum.
VII. Payoff Tables

Q14. A payoff table is used to:

a) Display alternatives, states of nature, and payoffs
b) Determine the probabilities of states of nature
c) Eliminate uncertainty in decisions
d) Represent a decision tree
Answer: a) Display alternatives, states of nature, and payoffs
Analysis: Payoff tables summarize the outcomes for different decisions under various states
of nature.

Q15. In a payoff table, the rows typically represent:

a) States of nature
b) Decision alternatives
c) Probabilities of outcomes
d) Expected values
Answer: b) Decision alternatives
Analysis: Rows correspond to decision choices, while columns represent states of nature.

VIII. Decision Trees

Q16. A decision tree is a:

a) Graphical representation of payoffs and probabilities
b) Method for calculating regret
c) Table summarizing decisions
d) Static decision model
Answer: a) Graphical representation of payoffs and probabilities
Analysis: Decision trees provide a visual representation of sequential decisions and their
possible outcomes.

Q17. Decision trees are best suited for:

a) Complex, multi-stage decisions
b) Simple, single-stage decisions
c) Uncertainty-free decisions
d) Risk-free environments
Answer: a) Complex, multi-stage decisions
Analysis: Decision trees help in analyzing sequential decisions and their consequences.
IX. Expected Value of Perfect Information (EVPI)

Q18. EVPI measures:

a) The cost of collecting information
b) The maximum value a decision-maker would pay for perfect information
c) The regret of an optimal decision
d) The best possible payoff
Answer: b) The maximum value a decision-maker would pay for perfect information
Analysis: EVPI is the difference between the expected value with perfect information and
the expected value without it.

Q19. If EVPI is zero, it indicates that:

a) The decision-maker already has perfect information
b) There is no uncertainty in the decision
c) Additional information will not change the decision
d) The payoff table is invalid
Answer: c) Additional information will not change the decision
Analysis: A zero EVPI means that current information is sufficient to make the best decision.

Q20. EVPI is calculated as:

a)
Answer: a) EVPI=EVPI−EV
Analysis: EVPI is the difference between the expected value with perfect information
(EVPIEV_{PI}EVPI) and without it (EVEVEV).

I. Game Theory - Two-Person Zero-Sum Game

Q1. In a two-person zero-sum game, the sum of the payoffs is:

a) Always positive
b) Always zero
c) Always negative
d) Can be any value
Answer: b) Always zero
Analysis: In a zero-sum game, the total gain of one player is exactly equal to the total loss of
the other player.
Q2. The Nash equilibrium in a game is a situation where:
a) One player always wins
b) Both players cooperate
c) No player can improve their payoff by changing strategies, assuming the other player's
strategy is fixed
d) The payoffs are equal for both players
Answer: c) No player can improve their payoff by changing strategies, assuming the other
player's strategy is fixed
Analysis: The Nash equilibrium represents a stable outcome where neither player benefits
from changing their strategy.

Q3. In a two-person zero-sum game, the minimax strategy is:

a) The strategy that maximizes the player’s maximum loss
b) The strategy that minimizes the maximum loss
c) The strategy that maximizes the average payoff
d) The strategy that guarantees a certain payoff
Answer: b) The strategy that minimizes the maximum loss
Analysis: The minimax strategy aims to minimize the worst-case scenario by reducing the
maximum loss the player could face.

Q4. In game theory, the payoff matrix:

a) Displays the possible strategies of the players
b) Shows the amount of money exchanged between players
c) Represents the possible payoffs for each combination of strategies
d) Represents the outcome of the Nash equilibrium
Answer: c) Represents the possible payoffs for each combination of strategies
Analysis: The payoff matrix shows the outcomes of different strategy combinations in a
game.

Q5. If a game has a saddle point, it means:

a) The game has no optimal strategies
b) The player’s best strategy is fixed
c) The payoffs are variable
d) The game has a unique Nash equilibrium
Answer: b) The player’s best strategy is fixed
Analysis: A saddle point occurs when both players have optimal strategies, ensuring stable
payoffs.
II. Simulation

Q6. In simulation, random numbers are used to:

a) Predict future outcomes
b) Represent the variability of input data
c) Minimize uncertainty in models
d) Control the experimental conditions
Answer: b) Represent the variability of input data
Analysis: Random numbers are used in simulations to introduce randomness, allowing for
the modeling of uncertainty.

Q7. Monte Carlo simulation is most commonly used to:

a) Find exact solutions to mathematical problems
b) Estimate the probability of different outcomes in uncertain situations
c) Reduce the computational cost of simulations
d) Find the optimal solution in deterministic models
Answer: b) Estimate the probability of different outcomes in uncertain situations
Analysis: Monte Carlo simulations use random sampling to estimate complex probabilities
and outcomes in uncertain environments.

Q8. A discrete-event simulation is typically used to model:

a) Continuous processes
b) Randomized simulations only
c) Systems where events occur at distinct points in time
d) Deterministic systems
Answer: c) Systems where events occur at distinct points in time
Analysis: Discrete-event simulations model systems where state changes occur at specific
events rather than continuously.

Q9. In simulation, replication refers to:

a) The process of repeating a simulation run to increase accuracy
b) Using multiple random number generators
c) Randomly generating new input values
d) Running a simulation once to gather data
Answer: a) The process of repeating a simulation run to increase accuracy
Analysis: Replication helps improve the accuracy and reliability of simulation results by
averaging over multiple runs.
Q10. In a simulation model, the validation process ensures:
a) The model accurately represents the real-world system
b) The model is mathematically optimized
c) The randomness in the model is minimized
d) The number of runs is minimized
Answer: a) The model accurately represents the real-world system
Analysis: Validation checks if the model outputs match real-world data, confirming its
accuracy.

III. PERT & CPM

Q11. PERT (Program Evaluation and Review Technique) is primarily used to:
a) Predict exact project completion times
b) Model project timelines with uncertainty in task durations
c) Allocate resources efficiently
d) Estimate the budget of a project
Answer: b) Model project timelines with uncertainty in task durations
Analysis: PERT focuses on modeling project timelines and accommodating uncertainty in the
duration of activities.

Q12. The critical path in CPM (Critical Path Method) represents:

a) The path with the most number of tasks
b) The shortest time required to complete the project
c) The path with the longest total duration
d) The most costly activities in the project
Answer: c) The path with the longest total duration
Analysis: The critical path defines the sequence of tasks that determine the overall project
duration.

Q13. The slack time in a project is:

a) The total time allowed to complete the project
b) The time available for a task to be delayed without affecting the project’s completion date
c) The total duration of the critical path
d) The difference between estimated and actual task times
Answer: b) The time available for a task to be delayed without affecting the project’s
completion date
Analysis: Slack time provides flexibility in scheduling tasks without impacting the overall
project timeline.

Q14. In CPM, the earliest start time for a task is:

a) The time at which the task can start, given that all preceding tasks have been completed
b) The time at which the task is scheduled to begin
c) The time at which the project starts
d) The time needed to complete the task
Answer: a) The time at which the task can start, given that all preceding tasks have been
completed
Analysis: The earliest start time ensures that tasks are scheduled based on dependencies.

Q15. PERT analysis is more suited for projects with:

a) Well-defined task durations
b) Uncertain task durations
c) Short timelines
d) Long durations and minimal uncertainty
Answer: b) Uncertain task durations
Analysis: PERT is useful for projects with uncertain durations, as it accounts for variability in
task completion times.

IV. Financial Engineering

Q16. Financial engineering is primarily concerned with:

a) Managing financial risks and creating new financial instruments
b) Developing manufacturing technologies for the finance industry
c) Managing the production and distribution of financial products
d) Enhancing financial accounting practices
Answer: a) Managing financial risks and creating new financial instruments
Analysis: Financial engineering uses mathematical models and tools to manage risk and
design new financial products.

Q17. The Black-Scholes model is used to:

a) Price options and financial derivatives
b) Calculate the risk-free rate
c) Forecast stock prices
d) Optimize portfolio returns
Answer: a) Price options and financial derivatives
Analysis: The Black-Scholes model is widely used to calculate the theoretical price of
options, considering factors like volatility and time to maturity.

Q18. Derivatives in financial engineering are:

a) Stocks and bonds
b) Instruments whose value is derived from the value of an underlying asset
c) Long-term investment vehicles
d) Strategies to manage portfolio risk
Answer: b) Instruments whose value is derived from the value of an underlying asset
Analysis: Derivatives include options, futures, and swaps, which derive their value from
underlying assets like stocks or commodities.

Q19. A collateralized debt obligation (CDO) is a financial product that:

a) Secures debt against the government
b) Uses assets as collateral to secure a loan
c) Pools assets like mortgages and sells them as securities
d) Sells securities in the secondary market
Answer: c) Pools assets like mortgages and sells them as securities
Analysis: CDOs are structured financial products that pool debt obligations and then sell
them to investors.

Q20. The Monte Carlo method in financial engineering is primarily used for:
a) Pricing fixed-income securities
b) Simulating the behavior of financial markets under uncertainty
c) Calculating the risk-free rate
d) Valuing government bonds
Answer: b) Simulating the behavior of financial markets under uncertainty
Analysis: The Monte Carlo method helps simulate random variables in financial models to
estimate risks and future outcomes under uncertainty.