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Exam 9: Decision Analysis

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Question 41

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Two professors at a nearby university want to co-author a new textbook in either economics or statistics.They feel that if they write an economics book they have a 50% chance of placing it with a major publisher where it should ultimately sell about 40,000 copies.If they can't get a major publisher to take it,then they feel they have an 80% chance of placing it with a smaller publisher,with sales of 30,000 copies.On the other hand if they write a statistics book,they feel they have a 40% chance of placing it with a major publisher,and it should result in ultimate sales of about 50,000 copies.If they can't get a major publisher to take it,they feel they have a 50% chance of placing it with a smaller publisher,with ultimate sales of 35,000 copies. -What is the expected payoff for the decision to write the economics book?

A) 50,000 copies
B) 40,000 copies
C) 32,000 copies
D) 30,500 copies
E) 10,500 copies

F) A) and E)
G) A) and D)

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Question 42

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The exponential utility function assumes a constant aversion to risk

A) True
B) False

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Question 43

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The Bayes' decision rule strategy is:

Which of the following is not a criterion for decision making?

The maximin approach involves choosing the alternative with the highest payoff

-The maximin strategy is:

-The maximin strategy is:

Bayes' theorem is a formula for determining prior probabilities of a state of nature

What is the posterior probability of S1 given that the research predicts S1?

Graphical analysis can only be used in sensitivity analysis for those problems that have two decision alternatives

There is an option of paying $100 to have research done to better predict which state of nature will occur.When the true state of nature is S1,the research will accurately predict S1 60% of the time.When the true state of nature is S2,the research will accurately predict S2 80% of the time. -What is the expected value of perfect information?

An advantage of payoff tables compared to decision trees is that they permit us to analyze situations involving sequential decisions

-The maximax strategy is:

A decision tree branches out all of the possible decisions and all of the possible events

Prior probabilities refer to the relative likelihood of possible states of nature

-The maximum likelihood strategy is:

The expected value of perfect information is:

There is an option of paying $100 to have research done to better predict which state of nature will occur.When the true state of nature is S1,the research will accurately predict S1 60% of the time.When the true state of nature is S2,the research will accurately predict S2 80% of the time. -Given that the research is done,what is the joint probability that the state of nature is S1 and the research predicts S2?