Saint GBA334 Week 2 Quiz 1 Questions

Note: It is recommended that you your response as you complete each question.

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Question 1

ABC Inc. must make a decision on its current capacity for next year. Estimated profits (in $000s) based on next year’s demand are shown in the table below.

Next Year’s Demand

Alternative
Low High

Expand
$100 $200

Subcontract $50
$120

Do nothing
$40 $50

Refer to the information above. Assume that ABC Inc. has hired a marketing research firm that provided additional information regarding next year’s demand. Suppose that the probabilities of low and high demand are assessed as follows: P(Low) = 0.4 and P(High) = 0.6.

What is the expected value under certainty?

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Question 1 options:

200

160

140

Question 2

A plant manager is considering buying additional stamping machines to accommodate increasing demand. The alternatives are to buy 1 machine, 2 machines, or 3 machines. The profits realized under each alternative are a function of whether their bid for a recent defense contract is accepted or not. The payoff table below illustrates the profits realized (in $000’s) based on the different scenarios faced by the manager.

Alternative
Bid Accepted Bid
Rejected

Buy 1 machine
$10 $5

Buy 2 machines
$30 $4

Buy 3 machines
$40 $2

Refer to the information above. Assume that based on historical bids with the defense contractor, the plant manager believes that there is a 65% chance that the bid will be accepted and a 35% chance that the bid will be rejected.

What is the expected value under certainty?

Question 2 options:

1.95

17.25

1.05

27.75

Question 3

A bakery must decide how many pies to prepare for the upcoming weekend. The bakery has the option to make 50, 100, or 150 pies. Assume that demand for the pies can be 50, 100, or 150. Each pie costs $5 to
make and sells for $7. Unsold pies are donated to a nearby charity center. Assume that there is no opportunity cost for lost sales.

Using the information above, which alternative should be
chosen based on the criterion of realism with alpha = 0.8?

Question 3 options:

Make 150 pies

Make 50 pies

Make 100 pies

Question 4

Using the information above, which alternative should be
chosen based on the maximax criterion?

Question 4 options:

Make 150 pies

Make 50 pies

Make 100 pies

Question 5

An individual who is indifferent to risk would have a
utility curve that is linear.

Question 5 options:

True

False

Question 6

The expected value of perfect information (EVPI) places a lower bound on how much a decision maker should be willing to pay to obtain perfect information.

Question 6 options:

True

False

Question 7

Consider the following payoff table that represents the profits earned for each alternative (A, B, and C) under the states of nature S1, S2, and S3.

S1 S2 S3

A $60 $145
$120

B $75 $125
$110

C $95 $85
$130

Using the Laplace criterion, what would be the highest expected payoff?

Question 7 options:

$103.3

$120

$145

$108.3

$125

Question 8

Using the information above, which alternative should be chosen based on the Laplace criterion?

Question 8 options:

Make 100 pies

Make 150 pies

Make 50 pies

Question 9

Alternative
Bid Accepted Bid
Rejected

Buy 1 machine
$10 $5

Buy 2 machines
$30 $4

Buy 3 machines
$40 $2

Using the information above, which alternative should be chosen based on the minimax regret criterion?

Question 9 options:

Buy 3 machines

Buy 1 machine

Buy 2 machines

Question 10

The approach that is used for analyzing decision trees is
called:

Question 10 options:

expected monetary value.

maximin.

maximax.

Laplace.

minimax regret.