Chapter 3 Decision Analysis

116) Mark M. Upp has just been fired as the university book store manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of $50,000. If demand is low, he will lose $10,000. If he opens at Site 2 and demand is high he will generate a profit of $80,000, but he will lose $30,000 if demand is low. He also has decided that he will open at one of these sites. He believes that there is a 50 percent chance that demand will be high. He assigns the following utilities to the different profits:

U(50,000) = ? U(-10,000) = 0.22

U(80,000) = 1 U(-30,000) = 0

For what value of utility for $50,000, U(50000), will Mark be indifferent between the two alternatives?

117) Suppose that the payoff from an investment depends upon market conditions. A great market has a payoff of $200,000, a normal market has a payoff of $100,000, and a poor market has a payoff of $20,000. What is the Laplace criterion value?

118) Briefly describe decision making under certainty.

119) Briefly describe decision making under risk.

Diff: 2

Topic: TYPES OF DECISION-MAKING ENVIRONMENTS

120) Briefly describe decision making under uncertainty.

121) List the six steps in decision making.

MAKING

122) Describe the structure of a payoff table.

123) What is the difference between the Expected Monetary Value and Expected Value with Perfect Information?

124) Briefly describe decision tree analysis.

125) Briefly describe EVSI.

126) Describe the utility curve of a risk seeker.

127) Describe the utility curve of a risk avoider.

128) List the five major decision criteria used when making decisions under uncertainty.