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Chapter 19: Decision Theory
Student: ___________________________________________________________________________
1. True or False
In hypothesis testing, uncertainty is reflected in Type I but not Type II error.
True False
2. True or False
Decisions can never be made without the benefit of knowledge gained from sampling.
True False
3. True or False
A decision situation can be expressed as either a payoff table or a decision tree diagram.
True False
4. True or False
Incremental analysis is a technique especially useful for inventory decisions.
True False
5. True or False
In non-Bayesian decision making, the decision rule considers the respective probability of the states of nature.
True False
6. True or False
The maximum criterion specifies that we select the decision alternative having the lowest maximum payoff.
True False
7. True or False
The maximax criterion specifies that we select the decision alternative having the highest maximum payoff.
True False
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8. True or False
In using the minimax regret criterion, we must first construct a regret table.
True False
9. True or False
Regrets refer to the differences between each payoff and the worst possible payoff if that state of nature were to
occur.
True False
10. True or False
The minimax regret criterion specifies selection of the alternative with the lowest maximum regret.
True False
11. True or False
Bayesian decision making takes into account the probabilities for the respective states of nature.
True False
12. True or False
The profit if one more unit is stocked and sold is known as marginal profit.
True False
13. True or False
The expected opportunity loss for the alternative having the maximum expected payoff is the expected value of
perfect information.
True False
14. The level of doubt regarding the decision situation where both the possible states of nature and their exact
probabilities of occurrence are known is which of the following?
A. risk
B. uncertainty.
C. ignorance
D. expected payoff
E. state of nature
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15. Which of the following would not be considered a state of nature for a business firm?
A. Federal Reserve regulations.
B. Food and Drug Administration regulations.
C. The number of employees to hire.
D. Minimum wage regulations.
E. What other firms charge for price.
16. Which of the following would be considered a state of nature for a business firm?
A. Incentive programs for sales staff
B. Inventory levels
C. Salaries for employees
D. Site for new plant
E. Worker safety laws
17. A person builds a storm cellar in a region struck consistently with tornadoes. Which of the following
decision making criteria does this typify?
A. Maximum
B. Maximax
C. Maximum regret
D. Minimax
E. Maximum opportunity loss
18. A person bets his remaining savings on a horse race based on the large payoff if his horse wins. Which of
the following decision making criteria does this typify?
A. Maximum
B. Maximax
C. Minimax
D. Minimax regret
E. Maximum expected payoff
19. A homeowner takes out an insurance policy to try to insure against every contingency to avoid catastrophic
losses. Which of the following decision making criteria does this typify?
A. Maximum
B. Maximax
C. Minimax
D. Minimax regret
E. Maximum expected payoff
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20. Which of the following represents behavior of risk avoidance?
A. Bungee jumping.
B. Buying lottery tickets.
C. Entering magazine sweepstakes.
D. Buying a car with an air bag for both front seat occupants.
E. Skydiving.
21. The expected value of perfect information is the same as:
A. maximin payoff.
B. maximax payoff.
C. the expected opportunity loss for the best alternative.
D. the expected payoff.
E. the expected payoff with perfect information.
22. An investor has constructed the following payoff table for his profit in thousands of dollars.
What is the most the investor should be willing to pay for perfect information about the future state of the
economy?
____________________ thousand
________________________________________
23. A fruit stand manager must decide how many pounds of bananas to stock weekly. From past records it
appears that the demand for bananas is approximately normal with a mean of 1,200 pounds and a standard
deviation of 400 pounds. The cost of the bananas is $0.15 per pound and the usual selling price is $0.45 per
pound. At the end of each week a hog farmer comes by the fruit stand and purchases any unsold, over-ripened
bananas for $0.05 per pound. Calculate the amount of bananas the manager needs to purchase each week to
maximize his profit.
____________________ pounds
________________________________________
20240109020030_659ca8be140c1_chapter_19_decision_theory
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20240109020030_659ca8be140c1_chapter_19_decision_theory.rtf
Chapter 19: Decision Theory
Student: ___________________________________________________________________________
1. True or False
In hypothesis testing, uncertainty is reflected in Type I but not Type II error.
True False
2. True or False
Decisions can never be made without the benefit of knowledge gained from sampling.
True False
3. True or False
A decision situation can be expressed as either a payoff table or a decision tree diagram.
True False
4. True or False
Incremental analysis is a technique especially useful for inventory decisions.
True False
5. True or False
In non-Bayesian decision making, the decision rule considers the respective probability of the states of nature.
True False
6. True or False
The maximum criterion specifies that we select the decision alternative having the lowest maximum payoff.
True False
7. True or False
The maximax criterion specifies that we select the decision alternative having the highest maximum payoff.
True False
20240109020030_659ca8be140c1_chapter_19_decision_theory
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8. True or False
In using the minimax regret criterion, we must first construct a regret table.
True False
9. True or False
Regrets refer to the differences between each payoff and the worst possible payoff if that state of nature were to
occur.
True False
10. True or False
The minimax regret criterion specifies selection of the alternative with the lowest maximum regret.
True False
11. True or False
Bayesian decision making takes into account the probabilities for the respective states of nature.
True False
12. True or False
The profit if one more unit is stocked and sold is known as marginal profit.
True False
13. True or False
The expected opportunity loss for the alternative having the maximum expected payoff is the expected value of
perfect information.
True False
14. The level of doubt regarding the decision situation where both the possible states of nature and their exact
probabilities of occurrence are known is which of the following?
A. risk
B. uncertainty.
C. ignorance
D. expected payoff
E. state of nature
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15. Which of the following would not be considered a state of nature for a business firm?
A. Federal Reserve regulations.
B. Food and Drug Administration regulations.
C. The number of employees to hire.
D. Minimum wage regulations.
E. What other firms charge for price.
16. Which of the following would be considered a state of nature for a business firm?
A. Incentive programs for sales staff
B. Inventory levels
C. Salaries for employees
D. Site for new plant
E. Worker safety laws
17. A person builds a storm cellar in a region struck consistently with tornadoes. Which of the following
decision making criteria does this typify?
A. Maximum
B. Maximax
C. Maximum regret
D. Minimax
E. Maximum opportunity loss
18. A person bets his remaining savings on a horse race based on the large payoff if his horse wins. Which of
the following decision making criteria does this typify?
A. Maximum
B. Maximax
C. Minimax
D. Minimax regret
E. Maximum expected payoff
19. A homeowner takes out an insurance policy to try to insure against every contingency to avoid catastrophic
losses. Which of the following decision making criteria does this typify?
A. Maximum
B. Maximax
C. Minimax
D. Minimax regret
E. Maximum expected payoff
20240109020030_659ca8be140c1_chapter_19_decision_theory
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20. Which of the following represents behavior of risk avoidance?
A. Bungee jumping.
B. Buying lottery tickets.
C. Entering magazine sweepstakes.
D. Buying a car with an air bag for both front seat occupants.
E. Skydiving.
21. The expected value of perfect information is the same as:
A. maximin payoff.
B. maximax payoff.
C. the expected opportunity loss for the best alternative.
D. the expected payoff.
E. the expected payoff with perfect information.
22. An investor has constructed the following payoff table for his profit in thousands of dollars.
What is the most the investor should be willing to pay for perfect information about the future state of the
economy?
____________________ thousand
________________________________________
23. A fruit stand manager must decide how many pounds of bananas to stock weekly. From past records it
appears that the demand for bananas is approximately normal with a mean of 1,200 pounds and a standard
deviation of 400 pounds. The cost of the bananas is $0.15 per pound and the usual selling price is $0.45 per
pound. At the end of each week a hog farmer comes by the fruit stand and purchases any unsold, over-ripened
bananas for $0.05 per pound. Calculate the amount of bananas the manager needs to purchase each week to
maximize his profit.
____________________ pounds
________________________________________
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