# saint GBA334 quiz 1

Quiz 1

Question 1. 1. 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? (Points : 3)

$103.3

$108.3

$120

$125

$145

Question 2. 2. 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 maximax criterion? (Points : 3)

Make 50 pies

Make 100 pies

Make 150 pies

Question 3. 3. 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

What is the expected value of perfect information (EVPI)? Assume P(S1) = 0.5 and P(S2) = 0.25. (Points : 3)

$0

$11.25

$15

$20

$35

Question 4. 4. 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.

Refer to the information above. Assume that the bakery has obtained the following probability information regarding demand for the pies: P(50) = 0.3, P(100) = 0.5, and P(150) = 0.2.

What is the expected value under perfect information (EVPI)? (Points : 3)

0

90

190

280

Question 5. 5. 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.

Which alternative should be chosen using the expected monetary value (EMV) criterion? (Points : 3)

Buy 1 machine

Buy 2 machines

Buy 3 machines

Question 6. 6. 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

Using the information above, which alternative should be chosen based on the maximin criterion? (Points : 3)

Expand

Subcontract

Do nothing

Question 7. 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 maximin criterion, what would be the highest expected payoff? (Points : 3)

$145

$125

$85

$75

$60

Question 8. 8. The expected monetary value (EMV) approach allows you to incorporate your own attitude toward risk. (Points : 3)

True

False

Question 9. 9. 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 minimax regret criterion? (Points : 3)

Make 50 pies

Make 100 pies

Make 150 pies

Question 10. 10. The EMV that a person is willing to give up in order to avoid the risk associated with a gamble is referred to as the __________. (Points : 3)

risk premium

certainty equivalent

EVPI

EVwPI

EVSI

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