MCQs: Choose only ONE answer

1. What makes the difference between good decisions and bad decisions?
(a) A good decision considers all available data.
(b) A good decision considers all alternatives.
(c) A good decision is based on logic.
(d) A good decision applies quantitative approaches.
(e) All the above

2. Which of the following is not considered a criteria for decision making under uncertainty?
(a) minimax regret
(b) pessimistic
(c) optimistic
(d) equally likely
(e) random selection

3. The EVSI represents the

(a) maximum EMV obtained after the use of the survey data.
(b) maximum EMV obtained prior to the use of the survey data.
(c) maximum value to be obtained from any survey.
(d) expected value of the test market information.
(e) opportunity loss for taking the best alternative.

4. The expected value of perfect information is

(a) higher than the expected value of sample information.
(b) lower than the expected value of sample information.
(c) equal to the minimum expected opportunity loss.
(d) none of the above
(e) all of the above

5. A popular decision criteria for making decisions under risk is

(a) maximax.
(b) maximin.
(c) minimax.
(d) select the best payoff.
(e) select the alternative with the highest expected monetary value.

6. Suppose my utility function for a positive asset position 𝑥 is given by 𝑢(𝑥) = 𝑒 . Am I

(a) risk-averse?
(b) risk-neutral?
(c) risk-seeking?
(d) independent?

7. A market research survey is available at no cost. Using a decision tree analysis, it is found that the expected
monetary value with the survey is $65,000. The expected monetary value with no survey is $62,000. What
is the maximum we should be willing to pay for the survey?
(a) $3,000
(b) $10,000
(c) $13,000
(d) $7,000
(e) none of the above

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8. The appropriate criterion is dependent on:
(a) the risk personality of the decision maker.
(b) the number of nodes in the decision tree.
(c) the magnitude of the payoffs.
(d) none of the above

9. Which of the following is true about the expected value of perfect information?
(a) It is the amount you would pay for any sample study.
(b) It is calculated as EMV minus expected value with perfect information.
(c) It is calculated as expected value with perfect information minus maximum EMV.
(d) It is the amount charged for marketing research.
(e) none of the above

10. Suppose my utility function for a positive asset position 𝑥 is given by 𝑢(𝑥) = −𝑥 . Am I
(a) risk-averse?
(b) risk-neutral?
(c) risk-seeking?
(d) independent?

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Question 1
A company is considering adding a new food product to your store for resale. The manager is certain that, in a
month, minimum demand for the product will be 10 units, while maximum demand will be 12 units.
Unfortunately, the new product has a one-month shelf life and is considered to be waste at the end of the month.
You will pay $40 /unit for this new product while you plan to sell the product at a $20 /unit profit.
The estimated demand for this new product in any given month is 10 units (p=0.3), 11 units( p=0.5), and 12
units(p=0.2).

1. If you choose to purchase 11 units for resale this month, what is the probability of selling all 11 units?
2. What is the probability of selling 11 or fewer units in any given month?
3. Using EMV analysis, how many units of the new product should be purchased for resale?
4. At the end of the month you end up with a profit of $200. How many units did you purchase for sale?

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Question 2
The following probabilities provide information about the accuracy of a market research firm.
Prob. of a favorable study given a favorable market = 0.7
Prob. of an unfavorable study given a favorable market = 0.3
Prob. of a favorable study given an unfavorable market = 0.05
Prob. of an unfavorable study given an unfavorable market = 0.95
If there is a 0.60 prior probability of a favorable market, find the following probabilities:
(a) Prob. of a favorable market given a favorable study.
(b) Prob. of an unfavorable market given an unfavorable study.

Question 3
A candidate has just been hired as the university bookstore 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) = 0.72 U(-10,000) = 0.22

U(80,000) = 1 U(-30,000) = 0
Using expected utility theory, what should the manager do?

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Question 4
The following payoff table provides profits based on various possible decision alternatives and various levels of
demand.

States of Nature
Demand
Alternatives Low Medium High
Alternative 1 80 120 140
Alternative 2 90 90 90
Alternative 3 50 70 150

The probability of a low demand is 0.4, while the probability of a medium and high demand is each 0.3.
(a) What decision would an optimist make?
(b) What decision would a pessimist make?
(c) What is the highest possible expected monetary value?
(d) Calculate the expected value of perfect information for this situation.

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Question 5
Mohsen is suing the manufacturer of his car for $3.5 million because of a defect that he believes caused him to
have an accident. The accident kept him out of work for a year. The company has offered him a settlement of
$700,000, of which Mohsen would receive $600,000 after attorneys' fees. His attorney has advised him that he has
a 50% chance of winning his case. If he loses, he will incur attorneys' fees and court costs of $75,000. If he wins, he
is not guaranteed of his full requested settlement. His attorney believes that there is a 50% chance he could receive
the full settlement, in which case Mohsen would realize $2 million after his attorney takes her cut, and a 50% chance
that the jury will award him a lesser amount of $1 million, of which Mohsen would get $500,000.

Using decision tree analysis, decide whether Mohsen should proceed with his lawsuit against the manufacturer.