A firm is deciding whether or not to place a new product on the market. They envisage three possible market reactions: high demand, moderate demand, and low demand. If demand is strong they expect to sell $200,000 per month of the good; moderate sales levels are expected to be $100,000; low sales are estimated at $40,000. The firm’s alternatives are:

A. sell in high, moderate, or low quantities.

B. market the product or sell production rights to another firm.

C. to market or not to market the product.

D. None of the above

In the scenario presented in #1 (above), the states of nature that the firm faces are:

A. $200,000, $100,000, and $40,000.

B. sell or don’t sell the product.

C. high demand, moderate demand, and low demand.

D. None of the above

For the scenario presented in #1 (above), the firm’s payoff:

A. is $60,000.

B. is high, moderate, or low demand.

C. is $340,000.

D. is $200,000, $100,000, and $40,000, respectively.

Please answer Questions 4-12 using the following information.

STATE

CHOICE I II

A $22,000 $15,000

B $20,000 $30,000

C $17,000 $34,000

1. The probability of state I occurring is 0.40, and the probability of state II occurring is 0.60. What is the expected monetary value of Choice B when State II occurs?

A. $ 7,200

B. $18,000

C. $25,000

D. $47,400

2. Besides a payoff table, information can be organized using a:

A. decision tree.

B. scatter diagram.

C. fishbone.

D. Pareto chart.

3. What is the most optimistic of all possible strategies?

A. Minimax

B. Maximax

C. Maximin

D. Minimax regret

4. A maximax strategy will always choose the act or alternative that:

A. maximizes the expected monetary value.

B. minimizes the maximum regret or opportunity loss.

C. maximizes the potential payoff regardless of uncertainty.

D. guarantees a payoff for any state of nature.

5. A maximin strategy will always choose the act or alternative that:

A. maximizes the expected monetary value.

B. minimizes the maximum regret or opportunity loss.

C. maximizes the potential payoff regardless of uncertainty.

D. guarantees a payoff for any state of nature.

6. A minimax regret strategy will always choose the act or alternative that:

A. maximizes the expected monetary value.

B. minimizes the maximum regret or opportunity loss.

C. maximizes the potential payoff regardless of uncertainty.

D. guarantees a payoff for any state of nature.

7. Based on the information in the chart in #4 (above), What is the expected monetary value of Choice C?

A. $23,600

B. $25,500

C. $27,200

D. $40,000

8. Based on the information in the chart in #4 (above), the greatest expected payoff is represented by:

A. selecting Choice C.

B. selecting Choice C if expecting State I to occur.

C. State I occurring.

D. State II occurring.

9. Based on the information in the chart in #4 (above), what is the opportunity loss of selecting Choice B when State II occurs?

A. $0

B. $4,000

C. $8,000

D. $10,000

10. Based on the information in the chart in #4 (above), what is the expected opportunity loss of selecting Choice A?

A. $0

B. $6,000

C. $11,400

D. $19,000

11. Based on the information in the chart in #4 (above), what is the expected opportunity loss of selecting Choice B?

A. $0

B. $3,200

C. $6,000

D. It depends on which state occurs.

12. Based on the information in the chart in #4 (above), to minimize expected opportunity loss, we should select:

A. Choice A.

B. Choice B.

C. Choice C.

D. It depends on which state occurs.

13. Based on the information in the chart in #4 (above), using a minimax regret strategy, we should select:

A. Choice A.

B. Choice B.

C. Choice C.

D. None of the above

Another way of deciding which common stock to purchase is to determine the profit that might be lost because the exact state of nature (the market behavior) was not known at the time the investor bought the stock. This potential loss is called:

A. opportunity loss or regret.

B. negative state of nature.

C. minimization.

D. condition of uncertainty. Reset Selection

Based on the information in the chart in #4 (above), what is the expected value of perfect information?

A. $2,000

B. $2,600

C. $4,200

D. $6,800

The expected value of perfect information:

A. is equal to the expected value of conditions under certainty minus the optimal decision under uncertainty.

B. is the same as the minimum of the expected regrets.

C. is the dollar value of knowing the outcome of an event in advance.

D. All of the above

Based on the information in the chart in #4 (above), for the purposes of building a decision tree, the value of $20,000 for Choice B given that State I occurs is:

A. a backward induced variable.

B. perfect information.

C. known as a conditional payoff.

D. the optimal decision strategy.