Introduction to Mangement Science Chapter 9

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.
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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.
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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.
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, 19. Sensitivity analysis may be useful in decision analysis since prior probabilities may be inaccurate.
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20. Graphical analysis can only be used in sensitivity analysis for those problems that have two decision
alternatives.
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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.
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23. Bayes' theorem is a formula for determining prior probabilities of a state of nature.
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24. The Sensit Plot tool is useful for examining the impact of changes in several data values at once.
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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.
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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.