Question

Multiple Choice Questions. Select the correct answer....

1. Of the following, which one would not be considered a state of nature?

1. The gross national product
2. The status of legislation that could ban one of the firm’s products
3. The weather
4. The price of the firm’s product

2. A decision maker knows the possible states of nature that could occur, but does not know their exact probabilities. He is in the situation known as:

1. Risk
2. Uncertainty
3. Ignorance
4. Confidence

3. A small successful firm selects an alternative having no possibilities for either a large profit or a large loss.   If a giant corporation had faced the same payoff table, its decision would have been different. Which of the following criteria was most likely used by the small firm?

1. Maximin
2. Maximax
3. Expected payoff
4. None of the preceding

4. The expected value of perfect information tells us ------------- should be spent for additional information.

1. Approximately how much
2. The maximum amount that
3. The minimum amount that
4. Both (a) and (c)

Questions 15 through 20 refer to the following table.

                                                                       

States of Nature

                                                            i (prob. = 0.2)              ii (prob. = 0.8)

                                    A                                 8                                  20

            Alternatives    B                                 10                                6

                                    C                                 15                                5

                                    D                                 9                                  10       

5. For this payoff table, what is the expected payoff for alternative B?

1. 8.6
2. 17.6
3. 6.8
4. 16.0

6. What is the expected value of perfect information?

1. 2.6
2. 12.2
3. 1.4
4. 3.5

7. Using the maximin criterion, which alternative will be selected?

1. A
2. B
3. C
4. D

8. Using the maximax criterion, which alternative will be selected?

1. A
2. B
3. C
4. D

9. Using the minimax regret criterion, which alternative will be selected?

1. A
2. B
3. C
4. D

10. What is the expected opportunity loss associated with alternative A?

1. 2.1
2. 1.4
3. 2.8
4. 1.6

11. A person who bases all decisions on expected payoff can be described as

1. A risk avoider
2. A risk taker
3. Risk susceptible
4. Risk neutral

Answer 1

1. Here c) The weather would be considered as a state of nature. A state of nature is an external variable that decision makers can't cobtrol but they can categorise them into different parts and how it would affect each alternative by giving different profits for each state.

2. Since the decision maker does not know the probabilies of occurrence of each state of nature he's in a situation of b. Uncertainty.

3. There's no possibility of either large profit or large loss, so the small firm should be choosing the Expected payoff criteria that would tell it the max expected profit it can make and under which alternative. So option c is correct.

4. Expected value of perfect Information= Expected value with perfect information- Expected value without perfect information

So it tells us the maximum amount that we should spend for getting additional Information. So option a is correct.