B.F. Retread, a tire manufacturer, wants to select one of three feasible prototype designs for a new tire; A, B, C.
Revenues
Low (0.30)
Medium (0.50)
A
120,000
390,000
B
130,000
460,000
C
100,000
480,000
What is the best decision using the optimistic approach to decision making?
A.
B.
C.
D.
Decision A
Decision B
Decision C
Both Decision A & B
What is the best decision using the maxi-min approach to decision making?
A.
B.
C.
D.
Decision C
Both Decision A & C
Decision A
Decision B
What is the best decision if you prefer the mini-max regret approach?
A.
B.
C.
D.
Decision A
Decision C
Decision B
Both Decision A & B
Determine the maximum expected payoff.
A.
B.
C.
D.
$278,500
$285,000
$241,500
$276,000
Calculate the highest value you would pay for a highly reliable forecast.
A.
B.
C.
D.
$8,000
$7,000
$5,500
$6,500
What is the minimum expected opportunity loss?
A.
B.
C.
D.
$9,000
$6,500
$7,000
$43,500
High (0.20)
390,000
460,000
480,000
Venus Flycatcher Company sells exotic plants and is trying to decide which of two hybrid plants to introduce into
their product line.
Demand
Probabilities
.4
.3
.3
Hybrid/Demand
Low
Medium
High
Hybrid 1
-10,000
10,000
30,000
Hybrid 2
-15,000
10,000
35,000
If Venus wants to maximize expected profits, which Hybrid should be introduced?
A.
B.
C.
D.
Both
Neither
Hybrid 2
Hybrid 1
What is the most that Venus would pay for a highly reliable demand forecast?
A.
B.
C.
D.
$8,000
$10,000
$9,500
$1,500
Which decision is best if a pessimistic approach is taken?
A.
B.
C.
D.
Hybrid 2
Both have the same result.
Neither decision.
Hybrid 1 (It is better to lose 10,000 than to lose 15,000)
Management is uncomfortable stating probabilities for the states of nature for a trade bill passing. Depending
on its probability they will invest in one of three countries; A, B, or C.
Let p denote the probability of the bill passing.
Trade Bill Passes
A
320
B
260
C
370
At what probability or more would Country C be the best option?
A.
B.
C.
D.
Trade Bill Fails
160
210
0
p >0.50
p < 0.7619
p >0.7619
p >0.4545
After further review, management estimated the probability of the trade bill passing at 0.65. If the probability is
0.65, which country should be selected and what is the expected value associated with that decision?
A. Country C with an EV of 320
B. Country A with an EV of 264
C. Country A with an EV of 210
D. Country B with an EV of 160
The economy will either be in a state of prosperity or recession and the probability of either is uncertain. A
company wishes to invest in one of three ventures.
Prosperity
A
5
B
2
C
3
At what probability would you be indifferent between venture A & B?
A.
B.
C.
D.
Recession
-2
1
-1
0.67
0.33
0.25
0.50
Venture A
Venture B
Venture C
State of Prosperity
5
2
4
State of Recession
-2
1
0
At what probability of prosperity you would be indifferent to investing in venture B versus venture C?
A.
B.
C.
D.
0.33
0.25
0.67
0.50
Venus Flycatcher Company sells exotic plants and is trying to decide which of two hybrid plants to introduce into
their product line.
Probabilities
.4
.3
Hybrid/demand
Low
Medium
Hybrid 1
-10,000
10,000
Hybrid 2
-15,000
10,000
Which decision is best if a pessimistic approach is taken?
A.
B.
C.
D.
Hybrid 2
Hybrid 1
Neither decision.
Both have the same result.
Demand
.3
Medium
10,000
10,000
.3
High
30,000
35,000
A product is being considered and the market for the item may be Favorable or Unfavorable, the company must
decide if it is worth having the product reviewed by professionals. If the product is successful the profit is
$750,000 if the product is a failure then a negative payoff of $-250,000 results. Probability of Favorable =.80
What is the expected value at node 2?
A.
B.
C.
D.
$487.5
$500
$433.40
$400
What is the EVSI?
A.
B.
C.
D.
20.92
33.23
33.40
35.50
What is the EVofPI for Do Not Review?
A.
B.
C.
D.
90.10
68
60.55
87.50
What is the Efficiency Rating?
A.
B.
C.
D.
0.3323
0.3817
0.3980
0.4132
Should you have the product reviewed?
A.
B.
C.
D.
No, because the EV is lower for Review than Do Not Review
Yes, because the EV for Don Not Review is equal to the EV for Review
Yes, because the EV is higher for Review than Do Not Review.
Yes, because the EV is higher for Do Not Review than Review
What is the value at node 7?
A.
B.
C.
D.
500
562.50
62.50
625
What is the value at node 8?
A.
B.
C.
D.
145.75
312.75
167
458.50