### Sample Chapter

###### Sample  Questions

Quantitative Analysis for Management, 13e (Render et al.)

Chapter 1  Introduction to Quantitative Analysis

1) Interviews, statistical sampling, and company reports provide input data for quantitative analysis models.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

2) In the early 1900s, Henry Ford pioneered the principles of the scientific approach to management.

Diff:  Moderate

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

3) Managers do not need to be familiar with the limitations, assumptions, and/or specific applicability of the quantitative analysis technique to use it for accurate decision making.

Diff:  Moderate

Topic:  INTRODUCTION

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

4) During World War II, many new scientific and quantitative techniques were developed to assist the military, and these developments were so successful that many companies started using similar techniques in managerial decision making and planning after the war.

Diff:  Moderate

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

5) Business Analytics is a data-driven approach to decision making that allows companies to make better decisions.

Diff:  Moderate

LO:  1.2: Describe the three categories of business analytics.

AACSB:  Analytical thinking

Classification:  Concept

6) Descriptive Analytics is aimed at forecasting future outcomes based on patterns in the past data.

Diff:  Moderate

LO:  1.2: Describe the three categories of business analytics.

AACSB:  Analytical thinking

Classification:  Concept

7) When a problem is difficult to quantify, it may be necessary to develop unspecific objectives.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

8) The Quantitative Analysis Approach consists of six steps.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

9) A mathematical model shows the relationship between quantifiable and non-quantifiable information.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

10) Decision variables may also be called parameters.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

11) Model variables can be controllable or uncontrollable.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

12) A series of steps or procedures that are repeated is known as an algorithm.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

13) A model is a representation of a situation.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

14) A parameter is a measurable quantity that may vary or is subject to change.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

15) Trying various approaches and picking the one resulting in the best decision is called incomplete enumeration.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

16) All problems can be solved by considering only the quantitative issues.

Diff:  Easy

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

17) A profit equation is an example of a schematic model.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

18) Testing the data and model should be done before the results have been analyzed.

Diff:  Easy

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

19) Sensitivity analysis helps us estimate the effect of known and unknown errors in our model.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

20) Models can help us analyze a problem and sell a decision to those who must implement it.

Diff:  Easy

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Concept

21) A sensitivity analysis allows a manager to answer the “what if” questions.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

22) One problem in using a quantitative model is that the necessary data may be unavailable.

Diff:  Easy

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

23) Management support and user involvement are not essential in the successful implementation of quantitative analysis projects.

Diff:  Easy

Topic:  IMPLEMENTATION—NOT JUST THE FINAL STEP

LO:  1.7: Recognize implementation concerns of quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

24) Revenue is calculated by subtracting expenses from profit.

Diff:  Easy

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

25) In order for a break-even quantity to exist in the presence of positive fixed costs, sales price must exceed variable cost per unit.

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

26) Which of the following terms is interchangeable with quantitative analysis?

1. A) management science
2. B) economics
3. C) financial analysis
4. D) statistics

Diff:  Easy

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

27) Operations Research is known as

1. A) the science of numerical analysis.
2. B) the science of sensitivity analysis.
3. C) the science of better.
4. D) the science of modeling.

Diff:  Moderate

Topic:  INTRODUCTION

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

28) Who is credited with pioneering the principles of the scientific approach to management?

2. B) Henri Fayol
3. C) John R. Locke
4. D) Frederick W. Taylor

Diff:  Moderate

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

29) Which of the following techniques involves the study and consolidation of historical data for a business and an industry?

1. A) descriptive analytics
2. B) prescriptive analytics
3. C) predictive analytics
4. D) management science

Diff:  Moderate

LO:  1.2: Describe the three categories of business analytics.

AACSB:  Analytical thinking

Classification:  Concept

30) Which of the following techniques involves the use of optimization methods to provide new and better ways to operate based on specific business objectives?

1. A) descriptive analytics
2. B) prescriptive analytics
3. C) predictive analytics
4. D) quantitative analysis

Diff:  Moderate

LO:  1.2: Describe the three categories of business analytics.

AACSB:  Analytical thinking

Classification:  Concept

31) A(n) ________ is a representation of reality or a real-life situation.

1. A) objective
2. B) model
3. C) analysis
4. D) algorithm

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

32) A measurable quantity that may vary, or is subject to change, and can be controlled is known as a(n)

1. A) decision variable.
2. B) algorithm.
3. C) parameter.
4. D) solution.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

33) A set of logical and mathematical operations performed in a specific sequence is called a(n)

1. A) complete enumeration.
2. B) diagnostic analysis.
3. C) algorithm.
4. D) objective.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

34) The ability to examine the variability of a solution due to changes in the formulation of a problem is an important part of the analysis of the results. This type of analysis is called ________ analysis.

1. A) sensitivity
2. B) implicit
3. C) normal
4. D) scale

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

35) Which of the following is not one of the steps in the quantitative analysis approach?

1. A) Defining the Problem
2. B) Developing a Solution
3. C) Observing a Hypothesis
4. D) Testing a Solution

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

36) The condition of improper data yielding misleading results is referred to as

1. A) garbage in, garbage out.
2. B) break-even point.
3. C) uncontrollable variable.
4. D) postoptimality.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

37) Expressing profits through the relationship among unit price, fixed costs, and variable costs is an example of

1. A) a sensitivity analysis model.
2. B) a quantitative analysis model.
3. C) a postoptimality relationship.
4. D) a parameter specification model.

Diff:  Easy

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Concept

38) The widespread applicability of operations research methods to business followed which war?

1. A) the U.S. Civil War
2. B) World War I
3. C) World War II
4. D) the Korean War

Diff:  Moderate

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

39) A measurable quantity that is inherent in the problem is called a(n)

1. A) decision variable.
2. B) uncontrollable variable.
3. C) algorithm.
4. D) parameter.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

40) Trying various approaches and picking the one that results in the best decision is called

1. A) the trial-and-error method.
2. B) incomplete enumeration.
3. C) complete enumeration.
4. D) algorithmic approximation.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

41) Models that do not involve risk or chance are

1. A) probabilistic models.
2. B) postoptimality models.
3. C) deterministic models.
4. D) MIS models.

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Concept

42) If input data are accurate to three significant digits, then the solution results can be accurate to how many significant digits?

1. A) one
2. B) two
3. C) three
4. D) four

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

43) Postoptimality analysis is most closely associated with

1. A) collecting input data.
2. B) developing a model.
3. C) sensitivity analysis.
4. D) writing a computer program.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

44) The break-even point is an example of a

1. A) postoptimality model.
2. B) quantitative analysis model.
3. C) schematic model.
4. D) sensitivity analysis model.

Diff:  Easy

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Concept

45) A controllable variable is also called a

1. A) parameter.
2. B) decision variable.
3. C) mathematical model.
4. D) measurable quantity.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

46) Evaluating all possible values of a variable in a model is called

1. A) trial and error.
2. B) complete enumeration.
3. C) an algorithm.
4. D) variablization.

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

47) What is the formula for the break-even point of a simple profit model?

1. A) Fixed Cost / Variable Cost Per Unit
2. B) (Selling Price Per Unit – Variable Cost Per Unit) / Fixed Cost
3. C) Fixed Cost / (Selling Price Per Unit – Variable Cost Per Unit)
4. D) Fixed Cost / (Variable Cost Per Unit – Selling Price Per Unit)

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Concept

48) The break-even point of a simple profit model represents a(n)

1. A) decision variable.
2. B) uncontrollable variable.
3. C) parameter.
4. D) constant.

Diff:  Difficult

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Concept

49) Which Excel feature is an optimization technique that can maximize or minimize a quantity given a set of limitations or constraints?

1. A) Optimizer
2. B) Goal Seek
3. C) Analysis Tool-Pak
4. D) Solver

Diff:  Difficult

Topic:  THE ROLE OF COMPUTERS AND SPREADSHEET MODELS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.5: Use computers and spreadsheet models to perform quantitative analysis.

AACSB:  Information technology

Classification:  Concept

50) Which Excel feature allows the user to specify a target or goal and the variable that is desired to change in order to achieve that goal?

1. A) Solver
2. B) Goal Search
3. C) Target Search
4. D) Goal Seek

Diff:  Difficult

Topic:  THE ROLE OF COMPUTERS AND SPREADSHEET MODELS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.5: Use computers and spreadsheet models to perform quantitative analysis.

AACSB:  Information technology

Classification:  Concept

51) All of the following are real computer applications that perform quantitative analysis except

1. A) Solver in Excel.
2. B) Goal Seek in Excel.
3. C) Excel QM.
4. D) QA for Windows.

Diff:  Moderate

Topic:  THE ROLE OF COMPUTERS AND SPREADSHEET MODELS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.5: Use computers and spreadsheet models to perform quantitative analysis.

AACSB:  Information technology

Classification:  Concept

52) As one attempts to develop a model, which of the following problems might she encounter?

1. A) The assumptions made in order to apply the model will not be violated.
2. B) The model will provide an array of possible answers to the question the analyst poses.
3. C) Everyone will understand the problem in the same way.
4. D) Accurate data will not be available for the model.

Diff:  Easy

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

53) Which of the following is a picture, drawing, or chart of reality?

1. A) scale model
2. B) physical model
3. C) mathematical model
4. D) schematic model

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

54) Which of the following is not considered a possible problem in the quantitative analysis approach?

1. A) validity of the data
2. B) lack of commitment
3. C) resistance to change
4. D) subjective solutions

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

55) The quantitative analysis approach begins with

1. A) data.
2. B) analysis.
3. C) models.
4. D) statistics.

Diff:  Easy

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

56) The popularity of the quantitative analysis approach is largely attributed to

1. A) big data.
2. B) computers.
3. C) the deep web.
4. D) the worldwide web.

Diff:  Moderate

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

57) What element contributes to automation of the decision-making process?

1. A) predictive analytics being greater than prescriptive analytics
2. B) prescriptive analytics being greater than predictive analytics
3. C) lack of qualitative factors
4. D) presence of both production and operations management

Diff:  Moderate

Topic:  WHAT IS QUANTITATIVE ANALYSIS?

LO:  1.1: Describe the quantitative analysis approach and understand how to apply it to a real situation.

AACSB:  Analytical thinking

Classification:  Concept

58) Which of the following techniques involves forecasting models such as statistical and mathematical models?

1. A) descriptive analytics
2. B) prescriptive analytics
3. C) predictive analytics
4. D) quantitative analysis

Diff:  Moderate

LO:  1.2: Describe the three categories of business analytics.

AACSB:  Analytical thinking

Classification:  Concept

59) Which of these techniques would be considered predictive analytics?

1. A) transportation models
2. B) economic order quantity models
3. C) linear programming
4. D) simulation

Diff:  Difficult

LO:  1.2: Describe the three categories of business analytics.

AACSB:  Analytical thinking

Classification:  Concept

60) Which of these pairs of terms is in the order of greater scope to smaller scope?

1. A) business analytics — predictive analytics
2. B) predictive analytics — prescriptive analytics
3. C) prescriptive analytics — descriptive analytics
4. D) descriptive analytics — business analytics

Diff:  Difficult

LO:  1.2: Describe the three categories of business analytics.

AACSB:  Analytical thinking

Classification:  Concept

61) Mickey built his lemonade stand out of \$250 worth of plywood and paint. He sells a glass of lemonade for \$3 and uses \$1.25 of lemons, sugar and water to make his product. How many glasses of lemonade does he need to sell to break even?

1. A) 170
2. B) 161
3. C) 152
4. D) 143

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

62) Mickey built his lemonade stand out of \$75,000 worth of plywood and paint. He sells a glass of lemonade for \$30 and uses \$1.25 of lemons, sugar and water to make his product. How many glasses of lemonade does he need to sell to break even?

1. A) 2608
2. B) 2544
3. C) 2396
4. D) 2434

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

63) Mickey built his lemonade stand out of \$75,000 worth of plywood and paint. He uses \$2.25 of lemons, sugar and water to make his product. What does the selling price of the lemonade need to be to break even at 40 glasses?

1. A) \$2,024.50
2. B) \$1,877.25
3. C) \$2,196.50
4. D) \$1,956.75

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

64) KJ built his taco truck out of \$75,000,000 worth of titanium and duct tape. He uses \$5.25 of ground beef, \$2.25 of cheese, and \$1.50 of lettuce in each taco. If he sells tacos at \$10 each, what is his break-even quantity?

1. A) 1,250,000
2. B) 15,000,000
3. C) 75,000,000
4. D) 750,000,000

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

65) KJ built his taco truck out of \$75,000,000 worth of titanium and duct tape. He uses \$2.25 of ground beef, \$0.75 of cheese, and \$0.25 of lettuce in each taco. If he sells tacos at \$10 each, what is his break-even quantity?

1. A) 11,111,111
2. B) 22,222,222
3. C) 40,000,000
4. D) 400,000

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

66) KJ built his taco truck out of \$75,000,000 worth of titanium and duct tape. He uses \$10.25 of organic bok choy, \$6.75 of Wisconsin cheddar cheese, and \$25.25 of foie gras in each taco. If he sells tacos at \$475 each, what is his break-even quantity?

1. A) 167,125
2. B) 173,310
3. C) 181,292
4. D) 194,640

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

67) Shirley’s time sitting at her desk was interrupted when two managers burst into her office with a particularly vicious problem — customer service ratings had been falling over the last quarter. The human resources manager explained that rewarding high performing workers with bonuses would improve customer service. The operations manager countered, noting that there was no way to identify high performing workers because different customer problems required radically different approaches by the workers. What roadblock is Shirley confronted with while trying to identify the true problem?

1. A) Conflicting viewpoints
2. B) Impact on other departments
3. C) Beginning assumptions
4. D) Solution outdated

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

68) Shirley’s time sitting at her desk was interrupted when the human resources manager burst into her office with a particularly nasty problem — customer service ratings had been falling over the last quarter. The human resources manager explained that rewarding high performing workers with bonuses would improve customer service. Shirley agreed and implemented a bonus scale that initially seemed effective, however the increased payout for bonuses meant there was less money available for offsite storage used by the IT division. Sadly, their system backup tapes would have to be held at the same location as their main system. What roadblock is Shirley confronted with while trying to identify the true problem?

1. A) Conflicting viewpoints
2. B) Impact on other departments
3. C) Beginning assumptions
4. D) Solution outdated

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

69) Shirley’s time sitting at her desk was interrupted when the human resources manager burst into her office with a particularly pernicious problem — customer service ratings had been falling over the last quarter. The human resources manager explained that salaries were too low. Shirley reasoned that if salaries were too low, she could simply institute an across the board 50% increase for all employees. “That was easy,” Shirley thought to herself as she returned to her office to begin shopping for a new car. What roadblock is Shirley confronted with while trying to identify the true problem?

1. A) Conflicting viewpoints
2. B) Impact on other departments
3. C) Beginning assumptions
4. D) Solution outdated

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

70) Shirley’s time sitting at her desk was interrupted when the human resources manager burst into her office with a particularly vexing problem — customer service ratings had been falling over the last quarter. The human resources manager explained that they were behind on training programs for their workers. Shirley assembled a task force consisting of the brightest minds in the organization and gave them a charge — to look at the previous quarter’s issues and to develop training courses over the next 48 months to solve those issues. What roadblock is Shirley confronted with while trying to identify the true problem?

1. A) Conflicting viewpoints
2. B) Impact on other departments
3. C) Beginning assumptions
4. D) Solution outdated

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

71) As a general rule, complex problems require

1. A) complex models.
2. B) mathematical models.
3. C) ending assumptions.
4. D) accounting data.

Diff:  Easy

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

72) Most data generated in a firm come from

1. A) customer comment/feedback cards.
2. B) accounting reports.
3. C) information technology.
4. D) the worldwide web.

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

73) The analyst waited anxiously at his computer and finally the answer appeared — he would need 57 chickens to fund his retirement plan. Still, he had some nagging doubts about some assumptions he had made and he wondered how much faith he should put into the answer of 57. In order to test how reliable the figure 57 is, the analyst should conduct

1. A) simulation.
2. B) shock tests.
3. C) sensitivity analysis.
4. D) focus groups.

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

74) The analyst waited anxiously at his computer and finally the answer appeared — he would need 57 chickens to fund his retirement plan. Still, he had some nagging doubts about some assumptions he had made and he wondered how much faith he should put into the answer of 57. In order to test how reliable the figure 57 is, the analyst varied a number of parameters in the model and ran multiple tests for each set of input data. Each time, the model suggested he acquire 57 chickens — sometimes one more or one less, but never more than one chicken either side of 57. We could describe the solution as

1. A) correct.
2. B) static.
3. C) parametric.
4. D) robust.

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

75) The authors cite resistance to quantitative analysis as a major reason for lack of adoption. According to a Swedish study, what percentage of projects proposed by quantitative analysts was actually implemented?

1. A) 40%
2. B) 15%
3. C) 65%
4. D) 80%

Diff:  Moderate

Topic:  IMPLEMENTATION—NOT JUST THE FINAL STEP

LO:  1.7: Recognize implementation concerns of quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

76) The authors cite resistance to quantitative analysis as a major reason for lack of adoption. According to a Swedish study, what percentage of projects proposed by top management was actually implemented?

1. A) 58%
2. B) 98%
3. C) 78%
4. D) 38%

Diff:  Moderate

Topic:  IMPLEMENTATION—NOT JUST THE FINAL STEP

LO:  1.7: Recognize implementation concerns of quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

77) Successful implementation of a solution developed via quantitative analysis requires that the analyst

1. A) tell the users exactly what to do.
2. B) train the users in the theoretical underpinnings of the models considered.
3. C) work with users and take their feelings into account.
4. D) train the users in the theoretical underpinnings of the best model.

Diff:  Moderate

Topic:  IMPLEMENTATION—NOT JUST THE FINAL STEP

LO:  1.7: Recognize implementation concerns of quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

78) If the quantitative analyst is not an integral element of the department facing the problem

1. A) the solution is usually not accepted and implemented.
2. B) analyst morale is usually higher.
3. C) departmental morale is improved.
4. D) sometimes the modeling activity becomes an end to itself.

Diff:  Moderate

Topic:  IMPLEMENTATION—NOT JUST THE FINAL STEP

LO:  1.7: Recognize implementation concerns of quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

79) Identify the steps of the quantitative analysis approach.

Answer:  (1) Defining the Problem, (2) Developing a Model, (3) Acquiring Input Data, (4) Developing a Solution, (5) Testing the Solution, (6) Analyzing the Results, and (7) Implementing the Results

Diff:  Moderate

Topic:  THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.3: Describe the use of modeling in quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

80) What are the three categories of business analytics?

Answer:  (1) Descriptive analytics, (2) Predictive Analytics, and (3) Prescriptive analytics

Diff:  Moderate

LO:  1.2: Describe the three categories of business analytics.

AACSB:  Analytical thinking

Classification:  Concept

81) Identify some possible problems in the quantitative analysis approach.

Answer:  Answers will vary but may include: conflicting viewpoints, ignoring the impact on other departments, poor assumptions, outdated solutions, difficulty matching the textbook approach, trading off model complexity with ease of understanding, poor input data, hard-to-understand mathematics, and having only one answer is limiting.

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

82) Identify three potential problems with people (two with management and one with the quantitative analysts themselves) that may hinder successful implementation of a quantitative model.

Answer:  Answers will vary but may include: (1) lack of commitment by management, (2) resistance to change by management, and (3) lack of commitment by quantitative analysts.

Diff:  Moderate

Topic:  IMPLEMENTATION—NOT JUST THE FINAL STEP

LO:  1.7: Recognize implementation concerns of quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

83) How can an analyst overcome the threats to successful implementation of a quantitative model?

Answer:  Answers will vary; one solution is for analysts to work with users and take their feelings into account instead of telling them what to do.

Diff:  Moderate

Topic:  IMPLEMENTATION—NOT JUST THE FINAL STEP

LO:  1.7: Recognize implementation concerns of quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

A nutrition enthusiast is weighing the pros and cons of keeping a few chickens in his backyard, reasoning that eggs that he doesn’t eat he can sell to friends and neighbors. One trip to his local hardware store later, he returns with \$560 worth of lumber, paint and carpet and a weekend of fun assembling a chicken coop. He starts small, and invests another \$20 in two barred rock and two Buff Orpington hens. A 50-pound sack of layer pellets costs \$12 and water is essentially free. Much to his dismay, his doctor tells him his cholesterol is high, so he elects to sell all of his eggs to raise money for a popular statin medication. It takes the four hens a month to work their way through the sack of feed and during that time he collects 84 eggs, which he sells for \$5 per dozen.

84) What is his break-even point in dozens?

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

85) What is his profit the first month?

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

86) How many months pass before he realizes a profit from this enterprise?

Answer:  Revenue is \$35 per month and expenses are \$12, so his monthly profit is \$23, which must offset his initial investment of \$580 in hardware and chickens. 580/23 = 25.22 so approximately 25 (and 6.6 days) months pass before he realizes a profit from this business.

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

An urban farmer is pondering whether to invest in ducks or chickens to raise for eggs that she plans to sell to friends and neighbors. The materials needed to make a good henhouse and chicken run will cost \$560. A simple setup for ducks will be slightly higher at \$620 since they require water at all times. Ducklings and chicks are about the same in price — she figures that \$20 will be needed to get four females of either species. A 50-pound sack of layer pellets costs \$14 and water is essentially free. It will take the four hens a month to work their way through the sack of feed and during that time she can collect 84 eggs, which she plans to sell for \$5 per dozen. Ducks eat at the same rate but lay eggs at a higher rate — in one month she believes she can collect 108 eggs. Duck eggs are also more highly prized by consumers; the urban farmer believes they will sell for \$6 per dozen.

87) What is the break-even point for duck eggs? What is the break-even point for chicken eggs?

Answer:  Chicken eggs have a variable cost of 14/7 = \$2 per dozen and break-even of 580/(5-2) = 193.33 dozen. Duck eggs have a variable cost of 14/9 = \$1.56 per dozen and a break-even of 640/(6-1.56) = 144 dozen.

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

88) Suppose she decides to get both ducks and chickens, each receiving their own area in her backyard with separate housing. How many months after startup (assume that she buys mature birds that begin laying immediately) will profit from chickens equal profit from ducks?

Answer:  Chicken profit can be modeled as \$35 less \$14 for feed and the initial cost of \$580 while duck profit is \$54 less \$14 for feed and an initial cost of \$640. Setting these equal yields

\$21x-\$580 = \$40x-\$640, so at 3.16 months, the profit will be identical.

Diff:  Difficult

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

89) Suppose she decides to get both ducks and chickens, each receiving their own area in her backyard with separate housing. Plot profit lines for both ventures over a three-year period and determine a range of output for which each venture is superior.

Answer:  Chicken profit can be modeled as \$35 less \$14 for feed and the initial cost of \$580 while duck profit is \$54 less \$14 for feed and an initial cost of \$640. The chickens are initially more profitable (operate at a lower loss) but after 3.16 months the ducks are more profitable and continue as the months progress.

Diff:  Difficult

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

90) Suppose she decides to get both ducks and chickens, each receiving their own area in her backyard with separate housing. How much should the farmer charge for a dozen chicken eggs in order to make the profit from the chicken egg venture equal to the profit of the duck egg venture at the 12 month point of her operation? (Assume that she buys mature birds that begin laying immediately.)

Answer:  She will need to charge \$7 per dozen chicken eggs. Duck egg profit at month 12 is -\$160.

Diff:  Difficult

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

91) Suppose she decides to get both ducks and chickens, each receiving their own area in her backyard with separate housing. How much should the farmer charge for a dozen chicken eggs in order to make the chicken egg venture break even at month 12? (Assume that she buys mature birds that begin laying immediately.)

Answer:  She will need to charge \$8.90 per dozen chicken eggs.

Diff:  Difficult

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

92) Suppose she decides to get both ducks and chickens, each receiving their own area in her backyard with separate housing. How much should the farmer charge for a dozen duck eggs in order to make the duck egg venture break even at month 12? (Assume that she buys mature birds that begin laying immediately.)

Answer:  She will need to charge \$7.00 per dozen duck eggs.

Diff:  Moderate

Topic:  HOW TO DEVELOP A QUANTITATIVE ANALYSIS MODEL

LO:  1.4: Prepare a quantitative analysis model.

AACSB:  Analytical thinking

Classification:  Application

93) What is meant by the term data validity?

Answer:  Just as a valid model is one that is accurate and correctly represents the system under analysis, valid data is accurate and measures what it is represented as measuring.

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

94) Where is data usually collected at a firm and what problem arises from this for business analysts?

Answer:  Most data generated in a firm come from basic accounting reports. Frequently quantitative analysts tackling a problem need to collect data on costs not relevant to routine accounting analysis. If they ask for such data, they may be shocked to find that the data were simply never collected.

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

95) What are some issues with an analyst’s use of mathematical models in an organization?

Answer:  The first concern in developing solutions is that although the mathematical models we use may be complex and powerful, they may not be completely understood. Fancy solutions to problems may have faulty logic or data. The aura of mathematics often causes managers to remain silent when they should be critical. Complex models can give results that are not intuitive and therefore are rejected by managers.

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

96) Once a quantitative solution has been found to a business problem, what are the considerations in implementing it?

Answer:  Once a solution has been tested, the results must be analyzed in terms of how they will affect the total organization. You should be aware that even small changes in organizations are often difficult to bring about. If the results indicate large changes in organization policy, the quantitative analyst can expect resistance. In analyzing the results, the analyst should ascertain who must change and by how much, if the people who must change will be better or worse off, and who has the power to direct the change.

Diff:  Moderate

Topic:  POSSIBLE PROBLEMS IN THE QUANTITATIVE ANALYSIS APPROACH

LO:  1.6: Recognize possible problems in using quantitative analysis.

AACSB:  Analytical thinking

Classification:  Concept

Quantitative Analysis for Management, 13e (Render et al.)

Chapter 3  Decision Analysis

1) Expected monetary value (EMV) is the average or expected monetary outcome of a decision if it can be repeated a large number of times.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

2) Expected monetary value (EMV) is the payoff you should expect to occur when you choose a particular alternative.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

3) The decision maker can control states of nature.

Diff:  Easy

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

4) All decisions that result in a favorable outcome are considered to be good decisions.

Diff:  Moderate

Topic:  INTRODUCTION

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

5) The difference in decision making under uncertainty and decision making under certainty is that under uncertainty, we think we know the probabilities of the states of nature, while under certainty we know exactly the probabilities of the states of nature.

Diff:  Moderate

Topic:  TYPES OF DECISION-MAKING ENVIRONMENTS

LO:  3.2: Describe the types of decision-making environments.

AACSB:  Analytical thinking

Classification:  Concept

6) EVPI (expected value of perfect information) provides the decision maker a value of the lowest amount she should be willing to pay for additional information.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

7) EOL will always result in the same decision as the maximum EMV with revenue data, but will pick the worst alternative with cost data.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

8) Sensitivity analysis assumes no increasing or decreasing economies of scale.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

9) The maximax decision criterion is used by pessimistic decision makers and maximizes the maximum outcome for every alternative.

Diff:  Easy

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

10) The maximin decision criterion is used by pessimistic decision makers and minimizes the maximum outcome for every alternative.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

11) Optimistic decision makers tend to discount favorable outcomes.

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

12) The decision theory processes of maximizing expected monetary value (EMV) and minimizing expected opportunity loss (EOL) should lead us to choose the same alternatives.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

13) The several criteria (maximax, maximin, equally likely, criterion of realism, minimax regret) used for decision making under uncertainty cannot lead the choice of the same alternative.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

14) A decision table is sometimes called a payout table.

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

15) The maximum value in a regret table constructed from a decision table populated with cost data corresponds to the optimal alternative.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

16) Any problem that can be presented in a decision table can also be graphically portrayed in a decision tree.

Diff:  Moderate

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Concept

17) Any problem that can be represented in a decision tree can be easily portrayed in a decision table.

Diff:  Moderate

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Concept

18) The decision making criterion of realism only applies to maximizing expected payoff.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

19) In a decision table, all of the alternatives are listed down the left side of the table, while all of the possible outcomes or states of nature are listed across the top.

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

20) The EMV approach and Utility theory always result in the same choice of alternatives.

Diff:  Easy

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

21) Utility theory may help the decision maker include the impact of qualitative factors that are difficult to include in the EMV model.

Diff:  Easy

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

22) In a decision problem where we wish to use Bayes’ theorem to calculate posterior probabilities, we should always begin our analysis with the assumption that all states of nature are equally likely, and use the sample information to revise these probabilities to more realistic values.

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Concept

23) A utility curve that shows utility increasing at an increasing rate as the monetary value increases represents the utility curve of a risk seeker.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

24) A utility curve that shows utility increasing at a decreasing rate as the monetary value increases represents the utility curve of a risk seeker.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

25) A decision maker is assigning equal probabilities to all states of nature in a decision making under uncertainty situation but is uncomfortable doing so. Therefore, this is actually a decision making under risk situation.

Diff:  Difficult

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

26) Utility values typically range from -1 to +1.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

27) By studying a person’s Utility Curve, one can determine whether the individual is a risk seeker, risk avoider, or is indifferent to risk.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

28) The Laplace criterion represents a compromise between the maximax and maximin decisions.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

29) Utility theory provides a decision criterion that is superior to the EMV or EOL in that it may allow the decision maker to incorporate her own attitudes toward risk.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

30) The assignment of a utility value of 1 to an alternative implies that the alternative is preferred to all others.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

31) A second table (an opportunity loss table) must be computed when applying the maximin decision criterion.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

32) The following figure illustrates a utility curve for someone who is a risk seeker.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

33) An analytic and systematic approach to the study of decision making is referred to as

1. A) decision making under risk.
2. B) decision making under uncertainty.
3. C) decision theory.
4. D) decision analysis.

Diff:  Moderate

Topic:  INTRODUCTION

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

34) What makes the difference between good decisions and bad decisions?

1. A) A good decision is based on logic.
2. B) A good decision considers all available data.
3. C) A good decision considers all alternatives.
4. D) A good decision applies quantitative approaches.

Diff:  Easy

Topic:  INTRODUCTION

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

35) Expected monetary value (EMV) is

1. A) the average or expected monetary outcome of a decision if it can be repeated a large number of times.
2. B) the average or expected value of the decision, if you know what would happen ahead of time.
3. C) the average or expected value of information if it were completely accurate.
4. D) the amount you would lose by not picking the best alternative.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

36) Which of the following is not considered a criterion for decision making under uncertainty?

1. A) optimistic
2. B) pessimistic
3. C) equally likely
4. D) random selection

Diff:  Easy

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

37) A pessimistic decision-making criterion is

1. A) maximax.
2. B) equally likely.
3. C) maximin.
4. D) decision making under certainty.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

38) Which of the following is true about the expected value of perfect information?

1. A) It is the amount you would pay for any sample study.
2. B) It is calculated as EMV minus EOL.
3. C) It is calculated as expected value with perfect information minus maximum EMV.
4. D) It is the amount charged for marketing research.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

39) Which of the following is not a characteristic of a good decision?

1. A) based on logic
2. B) considers all available data
3. C) employs appropriate quantitative techniques
4. D) always results in a favorable outcome

Diff:  Moderate

Topic:  INTRODUCTION

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

40) The following is a payoff table giving costs for various situations.

 State 1 State 2 State 3 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

What decision would an optimist make?

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

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

41) The following is a payoff table giving costs for various situations.

 State 1 State 2 State 3 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

What decision would a pessimist make?

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

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

42) The following is a payoff table giving costs for various situations.

 State 1 State 2 State 3 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

What decision should be made based on the Laplace criterion?

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

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

43) The following is a payoff table giving costs for various situations.

 State 1 State 2 State 3 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

What decision should be made based on the minimax regret criterion?

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

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

44) The following is a payoff table giving costs for various situations.

 State 1 State 2 State 3 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

What are the regret values for Alternative 3 as read from State 1 to State 3?

1. A) 17, 16, 25
2. B) 29, 0, 7
3. C) 7, 32, 36
4. D) 23, 65, 91

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

45) The following is a payoff table giving profits for various situations.

 State 1 State 2 State 3 Probability 0.4 0.35 0.25 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

If a person were to use the expected monetary value criterion, what decision would be made?

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

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

46) The following is a payoff table giving profits for various situations.

 State 1 State 2 State 3 Probability 0.4 0.35 0.25 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

If a person selected Alternative 1, what would the expected profit be?

1. A) 51.7
2. B) 54.7
3. C) 55.0
4. D) 57.3

Diff:  Easy

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

47) The following is a payoff table giving profits for various situations.

 State 1 State 2 State 3 Probability 0.4 0.35 0.25 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

What is the expected value of perfect information?

1. A) 7.6
2. B) 8.4
3. C) 8.8
4. D) 9.2

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

48) Consider the following payoff table.

 State 1 State 2 State 3 Probability 0.4 0.35 0.25 Alternative 1 45 37 83 Alternative 2 16 59 72 Alternative 3 23 65 91 Alternative 4 44 33 55

Based upon these probabilities, a person would select Alternative 3. Suppose there is concern about the accuracy of these probabilities. A few of the analysts feel that the likelihood of State 1 is higher and that the likelihood of State 2 is much lower. If the likelihood of State 2 is reduced at the expense of State 1, how much lower can State 2’s likelihood fall before Alternative 3 is no longer optimal?

1. A) 0.05
2. B) 0.06
3. C) 0.07
4. D) 0.08

Diff:  Difficult

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

49) Consider the following payoff table.

 States of Nature Alternatives A B Alternative 1 100 150 Alternative 2 200 100 Probability 0.4 0.6

How much should be paid for a perfect forecast of the state of nature?

1. A) 170
2. B) 30
3. C) 10
4. D) 100

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

50) The following is a payoff table giving profits for various situations.

 States of Nature Alternatives A B C Alternative 1 100 120 180 Alternative 2 200 100 50 Alternative 3 120 140 120 Do Nothing 0 0 0

The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect forecast of the future were available, what is the expected value with this perfect information?

1. A) 130
2. B) 160
3. C) 166
4. D) 36

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

51) The following is a payoff table giving profits for various situations.

 States of Nature Alternatives A B C Alternative 1 100 120 180 Alternative 2 200 100 50 Alternative 3 120 140 120 Do Nothing 0 0 0

The probabilities for states of nature A, B, and C are 0.3, 0.5, and 0.2, respectively. If a perfect forecast of the future were available, what is the expected value of perfect information (EVPI)?

1. A) 166
2. B) 0
3. C) 36
4. D) 40

Diff:  Difficult

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

52) Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has prepared a payoff table to help analyze the situation.

 States of Nature Alternatives Good Market Fair Market Poor Market Open 1 380,000 70,000 – 400,000 Open 2 200,000 80,000 – 200,000 Do Nothing 0 0 0

As Nick does not know how his product will be received, he assumes that all three states of nature are equally likely to occur. If he uses the equally likely criterion, what decision would he make?

1. A) Open 1
2. B) Open 2
3. C) Good market
4. D) Fair market

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

53) Nick has plans to open some pizza restaurants, but he is not sure how many to open. He has prepared a payoff table to help analyze the situation.

 States of Nature Alternatives Good Market Fair Market Poor Market Open 1 380,000 70,000 – 400,000 Open 2 200,000 80,000 – 200,000 Do Nothing 0 0 0

Nick believes there is a 40 percent chance that the market will be good, a 30 percent chance that it will be fair, and a 30 percent chance that it will be poor. A market research firm will analyze market conditions and will provide a perfect forecast (they provide a money back guarantee). What is the most that should be paid for this forecast?

1. A) \$ 44,000
2. B) \$ 53,000
3. C) \$123,000
4. D) \$176,000

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

54) Which of the following is the fourth step of the “Six Steps in Decision Making”?

1. A) Select one of the mathematical decision theory models.
2. B) List the possible alternatives.
3. C) Apply the model and make your decision.
4. D) List the payoff or profit of each combination of alternatives and outcomes.

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

55) Which of the following is not one of the steps considered in the “Six Steps in Decision Making”?

1. A) Clearly define the problem at hand.
2. B) List the possible alternatives.
3. C) Apply the model and make your decision.
4. D) Evaluate the success of the decision.

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

56) Optimistic decision makers tend to

1. A) magnify favorable outcomes.
3. C) discount favorable outcomes.
4. D) A and B

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Reflective thinking

Classification:  Concept

57) Pessimistic decision makers tend to

1. A) magnify favorable outcomes.
3. C) discount favorable outcomes.
4. D) A and B

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

58) In decision theory, we call the payoffs resulting from each possible combination of alternatives and outcomes

1. A) marginal values.
2. B) conditional values.
3. C) conditional probabilities.
4. D) Bayesian values.

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

59) Another name for a decision table is a

1. A) payment table.
2. B) payout table.
3. C) payoff table.
4. D) pay-up table.

Diff:  Easy

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

60) How are decision tables organized?

1. A) alternatives down the left, states of nature on top, payoffs inside
2. B) states of nature down the left, alternatives on top, payoffs inside
3. C) alternatives down the left, payoffs on top, states of nature inside
4. D) payoffs down the left, alternatives on top, states of nature inside

Diff:  Easy

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

61) The three decision-making environments are decision making under

1. A) utility, risk, and certainty.
2. B) utility, risk, and uncertainty.
3. C) utility, certainty, and uncertainty.
4. D) risk, certainty, and uncertainty.

Diff:  Easy

Topic:  TYPES OF DECISION-MAKING ENVIRONMENTS

LO:  3.2: Describe the types of decision-making environments.

AACSB:  Analytical thinking

Classification:  Concept

62) In decision making under ________, there are several possible outcomes for each alternative, and the decision maker does not know the probabilities of the various outcomes.

1. A) risk
2. B) utility
3. C) certainty
4. D) uncertainty

Diff:  Moderate

Topic:  TYPES OF DECISION-MAKING ENVIRONMENTS

LO:  3.2: Describe the types of decision-making environments.

AACSB:  Analytical thinking

Classification:  Concept

63) In decision making under ________, there are several possible outcomes for each alternative, and the decision maker knows the probability of occurrence of each outcome.

1. A) risk
2. B) utility
3. C) certainty
4. D) probability

Diff:  Moderate

Topic:  TYPES OF DECISION-MAKING ENVIRONMENTS

LO:  3.2: Describe the types of decision-making environments.

AACSB:  Analytical thinking

Classification:  Concept

64) The optimistic decision criterion is the criterion of

1. A) maximax.
2. B) maximin.
3. C) realism.
4. D) equally likely.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

65) The Hurwicz criterion is also called the criterion of

1. A) regret.
2. B) equality.
3. C) optimism.
4. D) realism.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

66) The equally likely criterion is also called the ________ criterion.

1. A) Hurwicz
2. B) uncertainty
3. C) Laplace
4. D) LaFlore

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

Figure 1

67) Given this decision tree, alternatives emanate from

1. A) the node labeled 1.
2. B) the node labeled 2.
3. C) the node labeled 3.
4. D) the node labeled 4.

Diff:  Easy

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Concept

68) Given this decision tree, node 2 represents

1. A) an alternative.
2. B) a state of nature.
3. C) the optimal solution.
4. D) a non-optimal solution.

Diff:  Easy

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Concept

1. A) There are three alternatives and two states of nature.
2. B) There are eight decisions to be made.
3. C) There are two alternatives and three states of nature.
4. D) There are three payoffs.

Diff:  Easy

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Concept

70) A decision analyst began to sketch this decision tree at 8:30 this morning and now is just returning from her lunch break (she had the blue plate special and highly recommends it). If she resumes work on the decision tree at the point on the tree labeled 4, what is least likely to go there?

1. A) a positive payoff
2. B) a decision node
3. C) a state of nature node
4. D) a negative payoff

Diff:  Moderate

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Concept

71) The expected value of sample information (EVSI) can be used to

1. A) establish a maximum amount to spend on additional information.
2. B) calculate conditional probabilities.
3. C) establish risk avoidance.
4. D) provide points on a utility curve.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

72) A plant manager considers the operational cost per hour of five machine alternatives. The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm. The following table represents the operations cost per hour for each alternative-state of nature combination:

 States of Nature Weather related cost per hour Alternatives Cold cost/day Mild cost/day Warm cost/day Machine 1 \$50 \$40 \$45 Machine 2 \$45 \$42 \$47 Machine 3 \$40 \$35 \$54 Machine 4 \$60 \$25 \$48 Machine 5 \$45 \$40 \$45

Using the optimistic criterion, which alternative is best?

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

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

73) A plant manager considers the operational cost per hour of five machine alternatives. The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm. The following table represents the operations cost per hour for each alternative-state of nature combination:

 States of Nature Weather related cost per hour Alternatives Cold cost/day Mild cost/day Warm cost/day Machine 1 \$50 \$40 \$45 Machine 2 \$45 \$42 \$47 Machine 3 \$40 \$35 \$54 Machine 4 \$60 \$25 \$48 Machine 5 \$45 \$40 \$45

Using the pessimistic criterion, which alternative is best?

1. A) Machine 2
2. B) Machine 3
3. C) Machine 4
4. D) Machine 5

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

74) A plant manager considers the operational cost per hour of five machine alternatives. The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm. The following table represents the operations cost per hour for each alternative-state of nature combination:

 States of Nature Weather related cost per hour Alternatives Cold cost/day Mild cost/day Warm cost/day Machine 1 \$50 \$40 \$45 Machine 2 \$45 \$42 \$47 Machine 3 \$40 \$35 \$54 Machine 4 \$60 \$25 \$48 Machine 5 \$45 \$40 \$45

Using the equally likely criterion, which alternative is best?

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

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

75) A plant manager considers the operational cost per hour of five machine alternatives. The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm. The following table represents the operations cost per hour for each alternative-state of nature combination:

 States of Nature Weather related cost per hour Alternatives Cold cost/day Mild cost/day Warm cost/day Machine 1 \$50 \$40 \$45 Machine 2 \$45 \$42 \$47 Machine 3 \$40 \$35 \$54 Machine 4 \$60 \$25 \$48 Machine 5 \$45 \$40 \$45

Assume that for a randomly selected day, there is a 30% probability of cold weather, 50% probability of mild weather, and 20% probability of warm weather. What alternative is best using EMV?

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

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

76) A plant manager considers the operational cost per hour of five machine alternatives. The cost per hour is sensitive to three potential weather conditions: cold, mild, and warm. The following table represents the operations cost per hour for each alternative-state of nature combination:

 States of Nature Weather related cost per hour Alternatives Cold cost/day Mild cost/day Warm cost/day Machine 1 \$50 \$40 \$45 Machine 2 \$45 \$42 \$47 Machine 3 \$40 \$35 \$54 Machine 4 \$60 \$25 \$48 Machine 5 \$45 \$40 \$45

Assume that for a randomly selected day, there is a 30% probability of cold weather, 50% probability of mild weather, and 20% probability of warm weather. What is the EVPI?

1. A) \$5.8
2. B) \$6.6
3. C) \$1.6
4. D) \$3.2

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

77) A market research survey is available for \$10,000. Using a decision tree analysis, it is found that the expected monetary value with no survey is \$62,000. If the expected value of sample information is -\$7,000, what is the expected monetary value with the survey?

1. A) \$45,000
2. B) \$62,000
3. C) -\$17,000
4. D) \$55,000

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

78) In the construction of decision trees, which of the following shapes represents a state of nature node?

1. A) square
2. B) circle
3. C) diamond
4. D) triangle

Diff:  Easy

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

79) In the construction of decision trees, which of the following shapes represents a decision node?

1. A) square
2. B) circle
3. C) diamond
4. D) triangle

Diff:  Easy

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

80) Bayes’ theorem enables decision makers to revise probabilities based on

1. A) perfect information.
2. B) knowing, ahead of time, the actual outcome of the decision.
4. D) measurements of utility.

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Concept

81) In Bayesian analysis, conditional probabilities are also known as which of the following?

1. A) anterior probabilities
2. B) posterior probabilities
3. C) prior probabilities
4. D) marginal probabilities

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Concept

82) A company is considering producing a new children’s bar soap. A market research firm has told the company that if they perform a survey, a positive survey of a favorable market occurs 65 percent of the time. That is, P(positive survey | favorable market) = 0.65. Similarly, 40 percent of the time the survey falsely predicts a favorable market; thus, P(positive survey | unfavorable market) = 0.40. These statistics indicate the accuracy of the survey. Prior to contacting the market research firm, the company’s best estimate of a favorable market was 50 percent. So, P(favorable market) = 0.50 and P(unfavorable market) = 0.50. Using Bayes’ theorem, determine the probability of a favorable market given a favorable survey.

1. A) 0.62
2. B) 0.38
3. C) 0.53
4. D) 0.65

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Application

83) A decision sciences professor defines the P(A) = the likelihood one of his students will be bitten by a monkey on his trip to India and P(B) = an Indian monkey carries rabies. Which of these expressions represents the likelihood that given a monkey doesn’t have rabies, it will bite his student?

1. A) P(B|A’)
2. B) P(A’|B’)
3. C) P(A|B’)
4. D) P(A’|B)

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Application

84) The Hurwicz criterion coefficient of realism measures the decision maker’s degree of

1. A) utility.
2. B) pessimism.
3. C) certainty.
4. D) optimism.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

85) What is the range of the Hurwicz criterion coefficient of realism α?

1. A) 1 to 100
2. B) 1 to 10
3. C) 0 to 10
4. D) 0 to 1

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

86) Utilization of Bayes’ theorem requires the use of all but

1. A) prior probabilities.
2. B) conditional probabilities.
3. C) posterior probabilities.
4. D) expected monetary values (EMV).

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Concept

87) A risk avoider is a person for whom the utility of an outcome

1. A) decreases as the monetary value increases.
2. B) stays the same as monetary value increases.
3. C) increases at an increasing rate as the monetary value increases.
4. D) increases at a decreasing rate as monetary value increases.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

88) A utility curve showing utility increasing at an increasing rate as the monetary value increases represents

1. A) a risk avoider.
2. B) utility assessment.
3. C) a risk seeker.
4. D) conditional values.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

89) In constructing a utility curve

1. A) a comparison is made of the different amounts of money at different times.
2. B) the certainty of a certain amount is compared with the willingness to gamble that amount on a larger amount.
3. C) one takes the risk out of gambling.
4. D) inflation plays a critical part in the evaluation.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

90) Utility values typically range from

1. A) -1 to 1.
2. B) 1 to 10.
3. C) 0 to 1.
4. D) 1 to 100.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

91) A rational decision maker must choose between two alternatives. Alternative 1 has a higher EMV than Alternative 2, but the decision maker chooses Alternative 2. What might explain why this occurs?

1. A) Alternative 2 may have a higher expected utility.
2. B) Alternative 1 may have a lower expected opportunity loss.
3. C) The probabilities are not known.
4. D) A rational decision maker could not possibly choose alternative 2.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Reflective thinking

Classification:  Concept

92) Robert Weed is considering purchasing life insurance. He must pay a \$180 premium for a \$100,000 life insurance policy. If he dies this year, his beneficiary will receive \$100,000. If he does not die this year, the insurance company pays nothing and Robert must consider paying another premium next year. Based on actuarial tables, there is a 0.001 probability that Robert will die this year. If Robert wishes to maximize his EMV, he would not buy the policy if the EMV were negative for him. He has determined that the EMV is, negative for him, but decides to purchase the insurance anyway. Why?

1. A) He believes that the actual likelihood of his death occurring in the next twelve months is really much greater than the actuarial estimate.
2. B) While the EMV is negative, the utility gained from purchasing the insurance is positive, and high.
3. C) Mr. Weed is not rational.
4. D) A or C

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Reflective thinking

Classification:  Application

93) It is sometimes said that, “Those who gamble the most are the ones who can least afford to lose.” These people gamble because

1. A) the EMV is positive.
2. B) the EMV is negative.
3. C) the gambler has no family to consider if he/she dies.
4. D) there is utility other than monetary to consider.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

94) A manager is deciding whether or not to build a small facility. Demand is uncertain and can be either at a high or low level. If the manager chooses a small facility and demand is low, the payoff is \$300. If the manager chooses a small facility and demand is high, the payoff is \$100. On the other hand, if the manager chooses a large facility and demand is low, the payoff is -\$200, but if demand is high, the payoff is \$800.

(a) What would be the best decision based on the maximax criterion?

(b) What would be the best decision based on the maximin criterion?

(c) What would be the best decision based on the minimax regret?

Answer:  large facility – highest overall payoff = \$800

small facility – highest minimum potential payoff = \$100

large facility – lowest maximum regret = \$500

Diff:  Easy

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

95) A manager is deciding whether or not to build a small facility. Demand is uncertain and can be either at a high or low level. If the manager chooses a small facility and demand is low, the payoff is \$100. If the manager chooses a small facility and demand is high, the payoff is \$300. On the other hand, if the manager chooses a large facility and demand is low, the payoff is -\$200, but if demand is high, the payoff is \$800.

(a) What would be the best decision based on the Laplace criterion?

(b) What would be the best decision based on Hurwicz’s criterion of realism using α = 0.6?

Answer:  large facility – equally weighted payoff = \$300

large facility – weighted average = \$400

Diff:  Easy

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

96) A concessionaire for the local ballpark has developed a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd). All values are in US Dollars.

 Large Average Small Probability .3 .5 .2 Alternative 1 9,000 12,000 -2,000 Alternative 2 22,000 6,000 6,000 Alternative 3 15,000 12,000 5,000

If the probabilities associated with the states of nature are 0.30 for a large crowd, 0.50 for an average crowd, and 0.20 for a small crowd, determine:

(a) the alternative that provides the greatest expected monetary value (EMV).

(b) the expected value of perfect information (EVPI).

Answer:  The maximum EMV is Alternative 3 at \$11,500

EVPI = 13,800 -11,500 = 2,300

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

97) A concessionaire for the local ballpark has developed a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd).

 Large Average Small Probability .3 .5 .2 Alternative 1 9,000 12,000 -2,000 Alternative 2 22,000 6,000 6,000 Alternative 3 15,000 12,000 5,000

If the probabilities associated with the states of nature are 0.30 for a large crowd, 0.50 for an average crowd, and 0.20 for a small crowd, determine:

(a) the opportunity loss table.

(b) minimum expected opportunity loss (EOL).

 Large Average Small Alternative 1 13,000 0 8,000 Alternative 2 0 6,000 0 Alternative 3 7,000 0 1,000

(b) minimum EOL = \$6,000 with Alternative 2

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

98) The concessionaire for Carnegie Hall has developed a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd).

 Large Average Small Alternative 1 9,000 12,000 -2,000 Alternative 2 22,000 6,000 6,000 Alternative 3 15,000 12,000 5,000

The concessionaire has no idea what sort of crowd might materialize — it has been decades since the Del Aires last performed together, but there has been a resurgence in interest thanks to a re-release of the classic movie Horror of Party Beach. Determine:

(a) the opportunity loss table.

(b) minimum expected opportunity loss (EOL).

 Large Average Small Alternative 1 13,000 0 8,000 Alternative 2 0 6,000 0 Alternative 3 7,000 0 1,000

(b) minimum EOL = \$6,000 with Alternative 2

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

99) The concessionaire for Carnegie Hall has developed a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd).

 Large Average Small Alternative 1 9,000 12,000 -2,000 Alternative 2 22,000 6,000 6,000 Alternative 3 15,000 12,000 5,000

The concessionaire has no idea what sort of crowd might materialize — it has been decades since the Del Aires last performed together, but there has been a resurgence in interest thanks to a re-release of the classic movie Horror of Party Beach. Determine:

(a) the optimal alternative if the concessionaire is an optimist.

(b) the optimal alternative if the concessionaire is a pessimist.

(a) The maximax (optimist’s) alternative is alternative 2 at \$22,000.

(b) The maximin (pessimist’s) alternative is alternative 2 at \$6,000.

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

100) The concessionaire for Carnegie Hall has developed a table of conditional values for the various alternatives (stocking decision) and states of nature (size of crowd).

 Large Average Small Alternative 1 9,000 12,000 -2,000 Alternative 2 22,000 6,000 6,000 Alternative 3 15,000 12,000 5,000

The concessionaire has no idea what sort of crowd might materialize — it has been decades since the Del Aires last performed together, but there has been a resurgence in interest thanks to a re-release of the classic movie Horror of Party Beach. Determine:

(a) the expected value of perfect information for this scenario.

(b) the optimal choice using the Laplace criterion.

(a) the EVPI = \$2,000 = \$13,333.33-\$11,333.33

(b) the Laplace criterion suggests alternative 2 at \$11,333.33

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

101) A manager needs to hire short-term employees to meet production demands. The manager would like to hire one of three possible short-term workers.

 States of Nature (Worker hours demanded) Alternatives 10 hr total pay 20 hr total pay 30 hr total pay Worker 1 \$1,000 \$1,800 \$2,400 Worker 2 \$900 \$1,800 \$2,500 Worker 3 \$950 \$1,750 \$2,550

(a) Which alternative is most optimistic?

(b) Which alternative is most pessimistic?

(c) Using the Hurwicz criterion with a coefficient of realism, α = 0.70, what is the best alternative?

(a) Worker 2 – \$900

(b) Worker 1 – \$2400

(c) Worker 2 – \$1380

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

102) A manager needs to hire short-term employees to meet production demands. The manager would like to hire one of three possible short-term workers. Ten hours are demanded with 50% probability, 20 hours are demanded with 30% probability, and 30 hours are demanded with 20% probability. The table below represents the alternatives and possible states of nature.

 States of Nature (Worker hours demanded) Alternatives 10 hr total pay 20 hr total pay 30 hr total pay Worker 1 \$1,000 \$1,800 \$2,400 Worker 2 \$900 \$1,800 \$2,500 Worker 3 \$950 \$1,750 \$2,550

Which alternative will minimize the expected monetary value?

What is the expected value of perfect information?

Answer:  Worker 2 – EMV = \$1490

EVPI = \$1490 – \$1455 = \$35

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

103) The ABC Co. is considering a new consumer product. They believe there is a probability of 0.4 that the XYZ Co. will come out with a competitive product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is \$40,000; if they add an assembly line and XYZ does follow, they still expect a \$10,000 profit. If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of \$600,000; if XYZ does compete for this market, ABC expects a loss of \$100,000.

(a) Determine the EMV of each decision.

(b) Determine the EOL of each decision.

(c) Compare the results of (a) and (b).

(d) Calculate the EVPI.

(a)

 Decision EMV add assembly line \$28,000 plant addition \$320,000 do nothing \$0

(b)

 Decision EOL add assembly line \$336,000 plant addition \$44,000 do nothing \$364,000

(c) The plant addition is best for both models. The maximum EMV alternative is always the same as the minimum EOL alternative.

(d) EVPI = 44,000

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

104) The ABC Co. is considering a new consumer product. They have no idea whether or not the XYZ Co. will come out with a competitive product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is \$40,000; if they add an assembly line and XYZ does follow, they still expect a \$10,000 profit. If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of \$600,000; if XYZ does compete for this market, ABC expects a loss of \$100,000.

Calculate Hurwicz’s criterion of realism using αs of a. 0.7, b. 0.3, and c. 0.1.

 Criterion of Realism Decision a. α = 0.7 b. α = 0.3 c. α = 0.1 add assembly line \$31,000 \$19,000 \$13,000 plant addition \$390,000 \$110,000 – \$30,000 do nothing \$0 \$0 \$0

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

105) Barbour Electric is considering the introduction of a new product. This product can be produced in one of several ways: (a) using the present assembly line at a cost of \$25 per unit, (b) using the current assembly line after it has been overhauled (at a cost of \$10,000) with a cost of \$22 per unit; and (c) on an entirely new assembly line (costing \$30,000) designed especially for the new product with a per unit cost of \$20. Barbour is worried, however, about the impact of competition. If no competition occurs, they expect to sell 15,000 units the first year. With competition, the number of units sold is expected to drop to 9,000. At the moment, their best estimate is that there is a 40% chance of competition. They have decided to make their decision based on the first year sales.

(a) Develop the decision table (EMV).

(b) Develop a decision table (EOL).

(c) What should they do?

(a)

 Alternative No Competition Competition EMV P = 0.60 P = 0.40 (a) Present line \$375,000 \$225,000 \$315,000 (b) Overhauled line \$340,000 \$208,000 \$287,200 (c) New line \$330,000 \$210,000 \$282,000

(b)

 Alternative No Competition Competition EMV P = 0.60 P = 0.40 (a) Present line \$45,000 \$17,000 \$33,800 (b) Overhauled line \$10,000 \$0 \$6,000 (c) New line \$0 \$2,000 \$800

(c) They should build the new line.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

106) 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.

(a) Alternative 3

(b) Alternative 2

(c) Alternative 1 maximum EMV = 110

(d) EVPI = 117 – 110 = 7

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY AND DECISION MAKING UNDER RISK

LO:  3.3: Make decisions under uncertainty. 3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

107) The ABC Co. is considering a new consumer product. They believe that the XYZ Co. may come out with a competing product. If ABC adds an assembly line for the product and XYZ does not follow with a competitive product, their expected profit is \$40,000; if they add an assembly line and XYZ does follow, they still expect a \$10,000 profit. If ABC adds a new plant addition and XYZ does not produce a competitive product, they expect a profit of \$600,000; if XYZ does compete for this market, ABC expects a loss of \$100,000. For what value of probability that XYZ will offer a competing product will ABC be indifferent between the alternatives?

Answer:  Let X = probability XYZ offers a competing product. Then:

EMV(assembly line) = \$10,000X + \$40,000(1 – X)

EMV(addition) = -\$100,000X + \$600,000(1 – X) or:

\$10,000X + \$40,000(1 – X) = -\$100,000 * X + \$600,000(1 – X) or:

\$10,000X – \$40,000X + \$40,000 = -\$100,000X – \$600,000X + \$600,000

-\$30,000X + \$700,000X = \$600,000 – \$40,000

\$670,000X = \$560,000

X = \$560,000/\$670,000 = 0.836

If the probability that XYZ will offer a competing product is estimated to be 0.836, then ABC will be indifferent between the two alternatives. If the probability that XYZ will offer a competing product is estimated to be less than 0.836, then ABC should invest in the addition.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

108) A company is considering expansion of its current facility to meet increasing demand. A major expansion would cost \$500,000, while a minor expansion would cost \$200,000. If demand is high in the future, the major expansion would result in an additional profit of \$800,000, but if demand is low, then there would be a loss of \$500,000. If demand is high, the minor expansion will result in an increase in profits of \$200,000, but if demand is low, then there is a loss of \$100,000. The company has the option of not expanding. For what probability of a high demand will the company be indifferent between the two expansion alternatives?

 States of Nature Alternatives Demand is high Demand is low Major expansion \$800,000 – \$500,000 -\$500,000 – \$500,000 Minor expansion \$200,000 – \$200,000 -\$100,000 – \$200,000 Do nothing \$0 \$0

 States of Nature Alternatives Demand is high Demand is low Major expansion \$300,000 -\$1,000,000 Minor expansion \$0 -\$300,000 Do nothing \$0 \$0

If we define X = probability of high demand, then:

\$300,000X – \$1,000,000(1 – X) = \$0X – \$300,000(1 – X)

X = 0.7

For a probability of high demand equal to 0.7, the decision maker would be indifferent between the two expansion alternatives.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

109) Orders for clothing from a particular manufacturer for this year’s Christmas shopping season must be placed in February. The cost per unit for a particular dress is \$20 while the anticipated selling price is \$50. Demand is projected to be 50, 60, or 70 units. There is a 40 percent chance that demand will be 50 units, a 50 percent chance that demand will be 60 units, and a 10 percent chance that demand will be 70 units. The company believes that any leftover goods will have to be scrapped. How many units should be ordered in February?

Payoff Table:

 States of Nature Demand (units) Alternatives 50 60 70 Order 50 1500 1500 1500 Order 60 1300 1800 1800 Order 70 1100 1600 2100 Probabilities: 0.4 0.5 0.1

EMV(50) = .4(1500) + .5(1500) + .1(1500) = 1500

EMV(60) = .4(1300) + .5(1800) + .1(1800) = 1600

EMV(70) = .4(1100) + .5(1600) + .1(2100) = 1450

Thus, 60 units should be ordered.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

110) 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. Using an α-value of 0.3, what is the criterion of realism value?

Answer:  0.3(\$200,000) + 0.7(\$20,000) = \$74,000

Diff:  Easy

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

111) A market research survey is available for \$5,000. Using a decision tree analysis, it is found that the expected monetary value with no survey is \$49,000. If the expected value of sample information is -\$4,000, what is the expected monetary value with the survey?

Answer:  EV with SI = 49,000 – \$4,000 + 5,000 = \$50,000

Diff:  Easy

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

112) David S Pumpkins is planning to open a sporting goods store. However, the initial investment is \$120,000. He currently has this money in a certificate of deposit earning 10 percent. He may leave it there if he decides not to open the store. If he opens the store and it is successful he will generate a profit of \$50,000. If it is not successful, he will lose \$90,000. What would the probability of a successful store have to be for David to prefer this to investing in a CD?

Answer:  p(50,000) – (1 – p)(90,000) > 0.10(120,000), therefore p > 0.7286

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

113) You are considering adding a new food product to your store for resale. You are certain that, in a month, minimum demand for the product will be 6 units, while maximum demand will be 8 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 \$60/unit for this new product while you plan to sell the product at a \$40/unit profit. The estimated demand for this new product in any given month is 6 units(p = 0.1), 7 units(p = 0.4), and 8 units(p = 0.5). Using EMV analysis, how many units of the new product should be purchased for resale?

Answer:  EMV(purchase 6 for resale) = 6(40)(0.1) + 6(40)(0.4) + 6(40)(0.5) = 240

EMV(purchase 7 for resale) = [6(40) – 60](0.1) + 7(40)(0.4) + 7(40)(0.5) = 270

EMV(purchase 8 for resale) = [6(40) – 2(60)](0.1) + [7(40) – 60](0.4) + 8(40)(0.5) = 260

Choose to purchase 7 units for resale (largest EMV)

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Application

114) Mark M. Upp has just been fired 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 the option of not opening at either site. He believes that there is a 50 percent chance that demand will be high. A market research study will cost \$5,000. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable.

(a) Should Mark use the study? Why?

(b) If the study is done and the results are favorable, what would Mark’s expected profit be?

(a) Yes, he should use the study. His EMV with the study is \$29,800 while the highest EMV without the study is \$25,000.

(b) Given a favorable survey result, Mark would select Site 2 and have an EMV of \$53,000.

Diff:  Moderate

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Application

115) Mark M. Upp has just been fired 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 the option of not opening either. He believes that there is a 50 percent chance that demand will be high. Mark can purchase a market research study. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable. Should Mark use the study? Why? What is the maximum amount Mark should be willing to pay for this study? What is the maximum amount he should pay for any study?

Answer:  Yes, he should use the study. His EMV with the study is \$34,800 while the highest EMV without the study is \$25,000. He should pay no more than \$9,800 for this study. He should pay no more than \$10,000 for a “perfect” study.

Diff:  Moderate

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Application

116) Before a marketing research study was done, John Colorado believed there was a 50/50 chance that his music store would be a success. The research team determined that there is a 0.9 probability that the marketing research will be favorable given a successful music store. There is also a 0.8 probability that the marketing research will be unfavorable given an unsuccessful music store.

(a) If the marketing research is favorable, what is the revised probability of a successful music store?

(b) If the marketing research is unfavorable, what is the revised probability of a successful music store?

(a) 0.82

(b) 0.11

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Application

117) Before a market survey is done, there is a 50/50 chance that a new soccer supply store would be a success. The people doing the survey have determined that there is a 0.9 probability that the survey will be favorable given a successful store. There is also a 0.75 probability that the survey will be unfavorable given an unsuccessful store. What is the probability that the survey will be unfavorable?

Answer:  (1 − .9)(.5) + (.75)(.5) = 0.425

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Application

118) Before a marketing research study was done, John Colorado believed there was a 50/50 chance that his music store would be a success. The research team determined that there is a 0.9 probability that the marketing research will be favorable given a successful music store. There is also a 0.8 probability that the marketing research will be unfavorable given an unsuccessful music store.

(a) If the marketing research is favorable, what is the revised probability of an unsuccessful music store?

(b) If the marketing research is unfavorable, what is the revised probability of an unsuccessful music store?

(a) 0.18

(b) 0.89

Diff:  Moderate

Topic:  HOW PROBABILITY VALUES ARE ESTIMATED BY BAYESIAN ANALYSIS

LO:  3.7: Revise probability estimates using Bayesian analysis.

AACSB:  Analytical thinking

Classification:  Application

119) Mark M. Upp has just been fired 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 60 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 Mark do?

Answer:  Expected utility (Site 1) = 0.6(0.72) + 0.4(0.22) = 0.52

Expected utility (Site 2) = 0.6(1.00) + 0.4(0.00) = 0.60

Therefore he should open at Site 2.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Application

120) 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?

Answer:  Expected utility (Site 1) = 0.5X + 0.5(0.22)

Expected utility (Site 2) = 0.5(1) + 0.5(0) = 0.50

Therefore: 0.5X + 0.5(0.22) = 0.50

or: 0.5X = 0.50 – 0.11 = 0.39

and: X = 0.39/0.5 = 0.78

Therefore, if Mark has U(50,000) = 0.78 he will be indifferent between the two alternatives.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Application

121) 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?

Answer:  (\$200,000 + \$100,000 + \$20,000) / 3 = \$320,000/3 = \$106,667

Diff:  Easy

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Application

122) Briefly describe decision making under certainty.

Answer:  Decision makers know with certainty of the consequence of every alternative or decision choice.

Diff:  Moderate

Topic:  TYPES OF DECISION-MAKING ENVIRONMENTS

LO:  3.2: Describe the types of decision-making environments.

AACSB:  Analytical thinking

Classification:  Concept

123) Briefly describe decision making under risk.

Answer:  There are several possible outcomes for each alternative, and the decision maker knows the probability of occurrence of each outcome.

Diff:  Moderate

Topic:  TYPES OF DECISION-MAKING ENVIRONMENTS

LO:  3.2: Describe the types of decision-making environments.

AACSB:  Analytical thinking

Classification:  Concept

124) A decision maker is faced with a decision making under uncertainty situation in a national election. He lays out his decision table and begins to enter equal probabilities for all states of nature into his spreadsheet. He feels uneasy doing so, reasoning that it can’t possibly be as likely that one candidate will win every tossup state. Advise the decision maker on an appropriate course of action in completing the decision table.

Answer:  If the decision maker recognizes that one state of nature is less likely than another, then this cannot truly be an appropriate application of decision making under uncertainty. The decision maker must know something if he realizes it is unreasonable to enter equal probabilities for all states of nature. Thus, the decision maker should treat this as decision making under risk and proceed with the analysis.

Diff:  Moderate

Topic:  TYPES OF DECISION-MAKING ENVIRONMENTS

LO:  3.2: Describe the types of decision-making environments.

AACSB:  Analytical thinking

Classification:  Concept

125) List the six steps in decision making.

Answer:  Clearly define the problem at hand.

List the possible alternatives.

Identify the possible outcomes or states of nature.

List the payoff or profit of each combination of alternatives and outcomes.

Select one of the mathematical decision theory models.

Apply the model and make your decision.

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

126) Which is the more crucial mistake in the decision-making process — estimating the payoffs poorly or omitting an important alternative?

Answer:  Answers will vary — the authors note that leaving out important alternatives is a big mistake. However, faulty estimates of payoffs may lead to incorrect decisions even if sensitivity analysis is performed.

Diff:  Moderate

Topic:  THE SIX STEPS IN DECISION MAKING

LO:  3.1: List the steps of the decision-making process.

AACSB:  Analytical thinking

Classification:  Concept

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

Answer:  The Expected Monetary Value looks at the best long run, weighted average outcome by probability, while the Expected Value with Perfect Information assumes that one will have the ability to select the best alternative, knowing the probabilistic outcome.

Diff:  Moderate

Topic:  DECISION MAKING UNDER RISK

LO:  3.4: Use probability values to make decisions under risk.

AACSB:  Analytical thinking

Classification:  Concept

128) Solve this decision tree.

Answer:  Expanding the factory has an expected payoff of 3.6M-1.5M = \$2.1M; Not expanding has a payoff of 1.8M-0 = 1.8M. Therefore, the factory should be expanded.

Diff:  Moderate

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Concept

129) Briefly describe EVSI.

Answer:  EVSI = EMV (best decision with sample information) – EMV (of best decision without sample information)

Diff:  Moderate

Topic:  DECISION TREES

LO:  3.6: Develop accurate and useful decision trees.

AACSB:  Analytical thinking

Classification:  Concept

130) Why do people make decisions that don’t maximize their expected monetary value? Explain why and offer three examples of such behavior.

Answer:  They do this because the monetary value is not always a true indicator of the overall value of the result of the decision. The overall worth of a particular outcome is called utility, and rational people make decisions that maximize the expected utility. Although at times the monetary value is a good indicator of utility, there are other times when it is not. This is particularly true when some of the values involve an extremely large payoff or an extremely large loss. Also, some things cannot be quantified easily and EMV has difficulty capturing altruistic behavior. Examples will vary, but could include quality of life issues such as forgoing a higher salary to spend time with family or live in a particular region of the country, or exchanging your own opportunities for those of your children.

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

131) Describe the utility curve of a risk avoider.

Answer:  utility increasing at a decreasing rate as the monetary value increases

Diff:  Moderate

Topic:  UTILITY THEORY

LO:  3.8: Understand the importance and use of utility theory in decision making.

AACSB:  Analytical thinking

Classification:  Concept

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

Answer:  (1) maximax (optimistic), (2) maximin (pessimistic), (3) criterion of realism (Hurwicz), (4) equally likely (Laplace), and (5) minimax regret

Diff:  Moderate

Topic:  DECISION MAKING UNDER UNCERTAINTY

LO:  3.3: Make decisions under uncertainty.

AACSB:  Analytical thinking

Classification:  Concept

Quantitative Analysis for Management, 13e (Render et al.)

Module 1  Analytic Hierarchy Process

1) In multifactor decision making, individuals quantitatively and objectively consider the various factors in making their decisions.

Diff:  Moderate

Topic:  INTRODUCTION

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Concept

2) Decision situations where we have difficulty in accurately determining various weighting factors are excellent candidates for the Analytic Hierarchy Process analysis.

Diff:  Moderate

Topic:  INTRODUCTION

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Concept

3) An equivalent name for the Multifactor Evaluation Process (MFEP) is the Analytic Hierarchy Process (AHP).

Diff:  Moderate

Topic:  INTRODUCTION

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Concept

4) When using the multifactor evaluation process, it is helpful if the importance weights for factors sum to 1.0.

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Concept

5) In the multifactor evaluation process, we always select the alternative that has the highest total weighted evaluation.

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Concept

6) In MFEP, the factor weights are summed and then multiplied by the total factor evaluation.

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Concept

7) The consistency ratio (CR) is an indicator of the equality of factors.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

8) λ is the average of the consistency ratios.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

9) CI = (λ – n ) / ( n – 1 )

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

10) If you can determine with confidence and accuracy the factor weights and factor evaluations, AHP is preferred over MFEP.

Diff:  Moderate

Topic:  COMPARISON OF MULTIFACTOR EVALUATION AND ANALYTIC HIERARCHY PROCESSES

LO:  M1.3: Contrast multifactor evaluation with the analytic hierarchy process.

AACSB:  Analytical thinking

Classification:  Concept

11) AHP gives the factor weights and factor evaluations from which the final decision can be made.

Diff:  Moderate

Topic:  COMPARISON OF MULTIFACTOR EVALUATION AND ANALYTIC HIERARCHY PROCESSES

LO:  M1.3: Contrast multifactor evaluation with the analytic hierarchy process.

AACSB:  Analytical thinking

Classification:  Concept

12) In AHP, the factor weights and evaluations are computed from a number of pairwise comparison matrices.

Diff:  Moderate

Topic:  COMPARISON OF MULTIFACTOR EVALUATION AND ANALYTIC HIERARCHY PROCESSES

LO:  M1.3: Contrast multifactor evaluation with the analytic hierarchy process.

AACSB:  Analytical thinking

Classification:  Concept

13) In AHP, if the consistency ratio demonstrates that the original pairwise comparisons are inconsistent, then the AHP evaluation should be abandoned in favor of the MFEP.

Diff:  Moderate

Topic:  COMPARISON OF MULTIFACTOR EVALUATION AND ANALYTIC HIERARCHY PROCESSES

LO:  M1.3: Contrast multifactor evaluation with the analytic hierarchy process.

AACSB:  Analytical thinking

Classification:  Concept

14) The AHP is typically preferred over the MFEP since it requires fewer calculations.

Diff:  Moderate

Topic:  COMPARISON OF MULTIFACTOR EVALUATION AND ANALYTIC HIERARCHY PROCESSES

LO:  M1.3: Contrast multifactor evaluation with the analytic hierarchy process.

AACSB:  Analytical thinking

Classification:  Concept

15) A decision-making technique in which individuals subjectively and intuitively consider the various factors in making their selection is known as

1. A) multifactor decision making.
2. B) the multifactor evaluation process.
3. C) the analytic hierarchy process.
4. D) pairwise comparison analysis.

Diff:  Moderate

Topic:  INTRODUCTION

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Concept

16) Mary states that the two factors critical to her having a successful vacation are golf course availability and good weather. If Mary insists that golf course availability is three times as important as the weather, what importance weights should be placed on golf course availability and good weather to be used for a multifactor evaluation process?

1. A) Golf Weight Weather Weight

0.80                   0.20

1. B) Golf Weight Weather Weight

0.20                   0.80

1. C) Golf Weight Weather Weight

0.75                   0.25

1. D) Golf Weight Weather Weight

0.25                   0.75

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

17) Given three alternatives and their total weighted evaluation, which action should be selected?

 Alternative Weighted Average A 0.6 B 0.8 C 0.6

1. A) Alternative A
2. B) Alternative B
3. C) Alternative C
4. D) Alternative A or Alternative C

Diff:  Easy

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

18) Given the following key factors and their importance weights, determine a total weighted evaluation for A3.

 Key Factor Importance Weights A1 A2 A3 K1 0.2 0.2 0.9 0.7 K2 0.7 0.8 0.5 0.4 K3 0.1 0.9 0.6 0.8

1. A) 0.69
2. B) 0.74
3. C) 0.59
4. D) 0.50

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

Table M1-1

Jason Rule has developed the following table to represent his research into the decision as to which college he would like to attend after graduation:

 Table M1-1 Factor Weight MSU BC PC UNH UM Yearly cost 0.40 0.4 0.3 0.5 0.7 0.6 Location 0.10 0.7 0.3 0.4 0.3 0.2 Campus housing 0.10 0.3 0.5 0.3 0.3 0.4 Available courses 0.20 0.8 0.5 0.4 0.7 0.7 Expected social life 0.10 0.8 0.7 0.5 0.3 0.2 Availability of intramural sports 0.05 0.8 0.6 0.4 0.6 0.7 Student-owned auto policy 0.05 0.9 0.7 0.3 0.8 0.8 1.00 0.59 0.44 0.44 0.58 0.54

19) Based on his weights and ratings of colleges, which college should he attend?

1. A) MSU
2. B) UM
3. C) UNH
4. D) PC

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

20) Based on Table M1-1, what should be Jason’s second choice?

1. A) MSU
2. B) BC
3. C) PC
4. D) UNH

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

21) Table M1-1 portrays Jason’s initial evaluation of the colleges of interest. Jason has now decided that he should emphasize Yearly Cost somewhat less, and Social Life somewhat more. His new ratings are: Yearly Cost: 0.30, and Social Life: 0.20. What will be his order of preference with these new weights?

1. A) UM, MSU, BC, PC, UNH
2. B) MSU, PC, UNH, BC, UM
3. C) MSU, UNH, UM, BC, PC
4. D) UNH, BC, UM, MSU, PC

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

22) Table M1-1 portrays Jason’s initial evaluation of the colleges of interest. Jason has now decided that (a) Social Life is more important than he first implied, and (b) that the student body at MSU is so large that he may feel lost—just a small fish in a big, big pond. He decides to change the weight for Social Life to 0.2, and change his rating of the Social Life at MSU to 0.4. He will compensate for the increase in the weight of Social Life by reducing the weight of Yearly Cost. Given these changes, what will be his second-choice college?

1. A) MSU
2. B) PC
3. C) UM
4. D) UNH

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

23) A pairwise comparison rating of 9 means that the two alternatives are

1. A) moderately preferred.
2. B) strongly preferred.
3. C) very strongly preferred.
4. D) extremely preferred.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

24) A pairwise comparison rating of 7 means that, relative to alternative 2, alternative 1 is

1. A) equally preferred.
2. B) moderately preferred.
3. C) strongly preferred.
4. D) very strongly preferred.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

25) Which of the following matrices is not a correct pairwise comparison matrix?

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

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

26) Shown below is an incomplete pairwise comparison matrix for three alternatives. What comparison factor should A3 receive when compared to A2?

 Factor A1 A2 A3 A1 1 3 5 A2 1 7 A3 ? 1

1. A) 3
2. B) 1/3
3. C) 7
4. D) 1/7

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

27) Table M1-2

 Factor MSU BC PC UNH UM MSU 1 7 8 8 9 BC 1 7 5 7 PC 1 6 9 UNH 1 8 UM 1

Table M1-2 displays the result of the pairwise comparisons of the various schools in which Jason has an interest. The completed table is

1. A)
 Factor MSU BC PC UNH UM MSU 1 7 8 8 9 BC 7 1 7 5 7 PC 8 7 1 6 9 UNH 8 5 6 1 8 UM 9 7 9 8 1
1. B)
 Factor MSU BC PC UNH UM MSU 1 7 8 8 9 BC 1/7 1 7 5 7 PC 1/8 1/7 1 6 9 UNH 1/8 1/5 1/6 1 8 UM 1/9 1/7 1/9 1/8 1
1. C)
 Factor MSU BC PC UNH UM MSU 1 7 8 8 9 BC 7 1 7 5 7 PC 8 9 1 6 9 UNH 5 6 7 1 8 UM 6 8 5 7 1
1. D)
 Factor MSU BC PC UNH UM MSU 1 7 8 8 9 BC 1/7 1 7 5 7 PC 1/8 1/8 1 6 9 UNH 1/9 1/7 1/6 1 8 UM 1/6 1/9 1/5 1/7 1

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

28) Table M1-3

 Factor MSU BC PC UNH UM MSU 1 5 7 3 8 BC 1/5 1 6 4 7 PC 1/7 1/6 1 9 5 UNH 1/3 1/4 1/9 1 7 UM 1/8 1/7 1/5 1/7 1

The normalized matrix for Table M1-3 is

1. A)
 Factor MSU BC PC UNH UM MSU 1 0.762 0.489 0.175 0.286 BC 0.111 1 0.419 0.233 0.250 PC 0.079 0.025 1 0.525 0.179 UNH 0.185 0.038 0.008 1 1 UM 0.069 0.022 0.014 0.008 0.036
1. B)
 Factor MSU BC PC UNH UM MSU 0.555 0.762 0.489 0.175 0.286 BC 0.111 0.152 0.419 0.063 0.372 PC 0.179 0.065 0.070 0.525 0.179 UNH 0.385 0.038 0.508 0.058 0.250 UM 0.069 0.022 0.014 0.008 0.036
1. C)
 Factor MSU BC PC UNH UM MSU 0.564 0.362 0.470 0.475 0.396 BC 0.152 0.152 0.419 0.233 0.250 PC 0.079 0.025 0.070 0.417 0.179 UNH 0.185 0.038 0.008 0.058 0.250 UM 0.069 0.022 0.014 0.008 0.036
1. D)
 Factor MSU BC PC UNH UM MSU 0.555 0.762 0.489 0.175 0.286 BC 0.111 0.152 0.419 0.233 0.250 PC 0.079 0.025 0.070 0.525 0.179 UNH 0.185 0.038 0.008 0.058 0.250 UM 0.069 0.022 0.014 0.008 0.036

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

29) Table M1-4

 Factor MSU BC PC UNH UM MSU 0.600 0.753 0.490 0.276 0.276 BC 0.120 0.151 0.420 0.165 0.241 PC 0.086 0.025 0.070 0.496 0.207 UNH 0.120 0.050 0.008 0.055 0.241 UM 0.075 0.022 0.012 0.008 0.034

Given the normalized Table M1-4, the priorities of the colleges are

1. A)
 MSU 0.095 BC 0.03 PC 0.479 UNH 0.219 UM 0.177
1. B)
 MSU 0.479 BC 0.219 PC 0.177 UNH 0.095 UM 0.03
1. C)
 MSU 0.095 BC 0.219 PC 0.03 UNH 0.479 UM 0.177
1. D)
 MSU 0.0305 BC 0.479 PC 0.03 UNH 0.095 UM 0.219

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

30) Shown below is a pairwise comparison matrix for coffee makers. What are the values of column one’s normalized matrix?

 Brand 1 Brand 2 Brand 3 Brand 1 1 5 8 Brand 2 1 7 Brand 3 1

1. A) 1.0000

0.2000

0.1250

1. B) 0.7547

0.1509

0.0943

1. C) 1.3250

6.6250

10.600

1. D) 5.1982

3.8764

4.9721

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

31) Shown below is a pairwise comparison matrix for coffee makers. What are the priorities for the three coffee maker brands?

 Brand 1 Brand 2 Brand 3 Brand 1 1 5 8 Brand 2 1 7 Brand 3 1

1. A) 0.7547

0.1509

0.0943

1. B) 0.5000

0.4375

0.0625

1. C) 2.0094

0.7393

0.2511

1. D) 0.6895

0.2504

0.06

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

32) Determine the weighted sum vector for the indicated factor evaluation and its original pairwise comparison matrix.

 C1 C2 C3 Factor Evaluation 0.6267 0.2633 0.1100

 C1 C2 C3 C1 1 2 7 C2 0.5 1 2 C3 0.1429 0.5 1

1. A) 0.7741

1.5717

5.0235

1. B) 5.0235

1.5717

0.7741

1. C) 1.9233

0.7967

0.3312

1. D) 0.3312

0.7966

1.9233

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

33) Determine the weighted sum vector for the indicated factor evaluation and its original pairwise comparison matrix.

 D1 D2 D3 Factor Evaluation 0.5443 0.1741 0.1148

 D1 D2 D3 D1 1 6 3 D2 0.1667 1 2 D3 0.3333 0.5 1

1. A) 0.4467

0.6057

2.2669

1. B) 1.9333

0.4944

0.3829

1. C) 0.3779

0.0917

0.0912

1. D) 2.5069

4.2082

0.7393

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

34) Jason Rule is considering attending one of five different schools. Shown below are the priorities and the original pairwise comparison matrix.

Priorities Table:

 MSU 0.4 BC 0.3 PC 0.2 UNH 0.07 UM 0.03

Pairwise Comparison Table:

 Table M1-5 Factor MSU BC PC UNH UM MSU 1 5 7 3 8 BC 1/5 1 6 4 7 PC 1/7 1/6 1 9 5 UNH 1/3 1/4 1/9 1 7 UM 1/8 1/7 1/5 1/7 1

The consistency vector is

1. A)
 1.5286 3.87103 1.31618 1.49411 0.164312
1. B)
 1.31618 3.5286 0.494108 1.87103 0.164312
1. C)
 3.41125 2.01801 1.39917 0.545705 0.170373

1. D)
 1.31618 0.494108 0.164312 3.5286 1.87103

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

35) In the Analytic Hierarchy Process, λ is

1. A) the average value of the consistency vector.
2. B) equivalent to the CI.
3. C) equivalent to the CR.
4. D) equivalent to the RI.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

36) Shown below is a consistency vector from an Analytic Hierarchy Process analysis.

2.6895

2.5555

2.7985

2.6105

Compute λ.

1. A) 2.7985
2. B) 2.6000
3. C) 10.6540
4. D) 2.6635

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

37) The consistency index is

1. A) the average value of the consistency vector.
2. B) CR/CI.
3. C) RI/CR.
4. D) (λ – n ) / (n – 1).

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

38) The consistency ratio is

1. A) the average value of the consistency vector.
2. B) CR/CI.
3. C) CI/RI.
4. D) (λ – n ) / (n – 1).

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

39) From an Analytic Hierarchy Process analysis, λ is computed to be 4.840, n = 3, RI = 0.58. Compute the consistency index.

1. A) 0.92
2. B) 1.5862
3. C) 1.092
4. D) 8.3448

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

40) From an Analytic Hierarchy Process analysis, λ is computed to be 4.123, n = 4, RI = 0.9. Compute the consistency index.

1. A) 4.5811
2. B) 1.0308
3. C) 0.0456
4. D) 0.0410

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

41) Given the following consistency vector

7.369716

8.524687

7.446627

5.208015

5.459544

calculate the consistency index.

1. A) 0.8502
2. B) -0.0207
3. C) 0.4504
4. D) -0.7399

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

42) Higher values of the CR indicate

1. A) the greater the level of consistency of the pairwise comparisons.
2. B) an indication of low consistency of the pairwise comparisons.
3. C) a moderate consistency of the pairwise comparisons.
4. D) an absence of consistency between the pairwise comparisons.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

43) From an Analytic Hierarchy Process analysis, λ is computed to be 4.840, n = 3, RI = 0.58. Compute the consistency ratio.

1. A) 0.92
2. B) 1.5862
3. C) 1.092
4. D) 8.3448

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

44) From an Analytic Hierarchy Process analysis, λ is computed to be 4.123, n = 4, RI = 0.9. Compute the consistency ratio.

1. A) 4.5811
2. B) 1.0308
3. C) 0.0456
4. D) 0.0410

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

45) Upon completion of an Analytic Hierarchy Process analysis, the CR = 0.047, thus

1. A) the decision makers’ answers are relatively consistent.
2. B) the decision makers should consider reevaluating their pairwise comparisons.
3. C) no conclusion is available for this value of the CR.
4. D) the decision maker has made near perfectly consistent pairwise comparisons.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

46) Given a consistency index of 0.2070, and an n of 5, use the following table to calculate the consistency ratio.

 n 2 3 4 5 6 7 8 RI 0 0.58 0.9 1.12 1.24 1.32 1.41

1. A) 0.0414
2. B) 0.1848
3. C) 2.8019
4. D) 0.2300

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

47) Upon completion of an Analytic Hierarchy Process analysis, the CR = 0.23, thus

1. A) the decision makers’ answers are relatively consistent.
2. B) the decision makers should consider reevaluating their pairwise comparisons.
3. C) no conclusion is available for this value of the CR.
4. D) the decision maker has made near perfectly consistent pairwise comparisons.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

48) The Analytic Hierarchy Process is preferred to a multifactor evaluation process when

1. A) there is high confidence in determining factor weights without pairwise comparisons.
2. B) there is low confidence in determining factor weights without pairwise comparisons.
3. C) one desires a lesser level of computational analysis.
4. D) there is a high confidence in determining factor weights with pairwise comparisons.

Diff:  Easy

Topic:  COMPARISON OF MULTIFACTOR EVALUATION AND ANALYTIC HIERARCHY PROCESSES

LO:  M1.3: Contrast multifactor evaluation with the analytic hierarchy process.

AACSB:  Analytical thinking

Classification:  Concept

Table M1-5

It is International Day on campus and a professor of Scottish, German, and Hawaiian ancestry is weighing his options for traditional attire among his kilt, lederhosen and grass skirt. He decides to weigh these alternatives using AHP and has decided that comfort, style, and ease of use are the most important criteria.

His pairwise comparison matrices are as follows:

 Comfort Kilt Lederhosen Grass Skirt Kilt 1 4 7 Lederhosen 1 3 Grass Skirt 1

 Style Kilt Lederhosen Grass Skirt Kilt 1 0.5 0.125 Lederhosen 1 5 Grass Skirt 1

 Ease of Use Kilt Lederhosen Grass Skirt Kilt 1 3 7 Lederhosen 1 5 Grass Skirt 1

 Factor Comfort Style Ease of Use Comfort 1 0.125 .25 Style 1 3 Ease of Use 1

49) Use Table M1-5 to determine the priority for the Kilt in the style factor’s normalized matrix.

1. A) 0.0874
2. B) 0.0909
3. C) 0.0738
4. D) 0.0769

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

50) Use Table M1-5 to determine the priority for the Lederhosen in the ease of use factor’s normalized matrix.

1. A) 0.2572
2. B) 0.2828
3. C) 0.1622
4. D) 0.2132

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

51) Use Table M1-5 to determine the priority for the grass skirt in the comfort factor’s normalized matrix.

1. A) 0.0712
2. B) 0.0738
3. C) 0.0853
4. D) 0.0874

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

52) Use Table M1-5 to determine the element in the weighted sum vector for the comfort factor for the kilt.

1. A) 0.6446
2. B) 0.7755
3. C) 2.2605
4. D) 2.1517

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

53) Use Table M1-5 to determine the element in the weighted sum vector for the style factor for the lederhosen.

1. A) 0.4871
2. B) 0.6446
3. C) 0.8662
4. D) 0.7755

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

54) Use Table M1-5 to determine the element in the weighted sum vector for the ease of use factor for the grass skirt.

1. A) 0.2049
2. B) 0.2223
3. C) 0.2566
4. D) 0.2623

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

55) Use Table M1-5 to determine the lambda for the comfort factor.

1. A) 3.0013
2. B) 3.0055
3. C) 3.0326
4. D) 3.0655

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

56) Use Table M1-5 to determine the consistency index for the style factor.

1. A) 0.0328
2. B) 0.0158
3. C) 0.0048
4. D) 0.0028

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

57) Use Table M1-5 to determine the consistency ratio for the ease of use factor.

1. A) 0.0565
2. B) 0.0656
3. C) 0.0454
4. D) 0.0545

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

58) Use Table M1-5 to determine the consistency ratio for the comfort factor.

1. A) 0.0163
2. B) 0.0281
3. C) 0.0328
4. D) 0.0416

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

59) In a four-factor analysis used in a multifactor evaluation process, it is desired to have the F1 importance weight four times as much as the F2 importance weight. The F2 importance weight should be four times as much as the F3 importance weight. The F3 importance weight should be four times as much as the F4 importance weight. Determine the appropriate importance weights of F1, F2, F3, F4 to be used in the multifactor evaluation process. (Hint: Consider numerator factors of 4.)

Answer:  F1 + F2 + F3 + F4 = 1, F1 = 4 F2, F2 = 4F3, F3 = 4F4

therefore, Importance Weight (F1) = 64/85

therefore, Importance Weight (F2) = 16/85

therefore, Importance Weight (F3) = 4/85

therefore, Importance Weight (F4) = 1/85

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

60) Two factors are considered essential to the selection of blue cheese for the Burgerhoff Restaurant color and texture. The Burgerhoff insists that color is four times as important as is texture for food presentation purposes. The Burgerhoff is considering two brands of blue cheese. After tasting the two brands, color and texture ratings have been assigned as indicated. Use a multifactor evaluation process to determine which brand of cheese best suits the needs of the Burgerhoff.

 Brand Color Texture A 0.8 0.6 B 0.7 0.8

Answer:  Importance Weight (Color) = 0.8

Importance Weight (Texture) = 0.2

Brand A: 0.8(0.8) + 0.2(0.6) = 0.76 <=======

Brand B: 0.8(0.7) + 0.2(0.8) = 0.72

Diff:  Moderate

Topic:  MULTIFACTOR EVALUATION PROCESS

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Application

61) Given the following initial pairwise comparison matrix, determine the consistency ratio.

 Factor A B C Item A 1 3 9 Item B 0.3333 1 8 Item C 0.1111 0.125 1

Weighted Sum Vector        Consistency Vector           λ = 3.1094

2.0463                         3.1978                      CI = 0.0547

0.9536                         3.1174                      CR = 0.0943

0.1636                         3.0129

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

62) Construct an initial pairwise comparison matrix with the following information regarding an Ease of Use factor about three different commercial student information systems. System C, when compared to System A, is strongly preferred. When System C is compared to System B, System C is only moderately preferred. When compared to System A, System B is strongly preferred.

Ease of Use     A         B         C

System A        1          0.2       0.2

System B         5          1          0.3333

System C         5          3          1

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

63) Given the following initial pairwise comparison matrix, determine the consistency ratio.

Factor        A            B            C

Item A       1             6             9

Item B       0.1667    1             3

Item C       0.1111    0.3333    1

Weighted Sum Vector      Consistency Vector           λ = 3.052

2.3880               3.1240                           CI = 0.0271

0.5027               3.030                             CR = 0.0467

0.2100               3.0086

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

64) Describe a multifactor evaluation process.

Answer:  All important factors are given relative weights of importance. Each alternative is evaluated in terms of the weights.

Diff:  Moderate

Topic:  INTRODUCTION

LO:  M1.1: Use the multifactor evaluation process in making decisions that involve a number of factors, where importance weights can be assigned.

AACSB:  Analytical thinking

Classification:  Concept

65) How is the consistency index computed?

Answer:  CI = (λ – n) / (n – 1)

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

66) Interpret the consistency ratio.

Answer:  CR < 0.10 indicates general consistency among pairwise comparisons.

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Concept

67) Compare and contrast AHP and MFEP.

Answer:  Multifactor decision making has a number of useful and important applications. If you know or can determine with confidence and accuracy the factor weights and factor evaluations, the MFEP is preferred. If not, you should use the AHP. As it turns out, the AHP also gives the factor weights and factor evaluations from which the final selection can be made. The only difference is that with the AHP, we compute the factor weights and factor evaluations from a number of pairwise comparison matrices. We also compute a consistency ratio to make sure that our responses to the original pairwise comparison matrix are consistent and acceptable. If they are not, we should go back and perform the pairwise comparison again.

Diff:  Moderate

Topic:  COMPARISON OF MULTIFACTOR EVALUATION AND ANALYTIC HIERARCHY PROCESSES

LO:  M1.3: Contrast multifactor evaluation with the analytic hierarchy process.

AACSB:  Analytical thinking

Classification:  Concept

Table M1-5

It is International Day on campus and a professor of Scottish, German, and Hawaiian ancestry is weighing his options for traditional attire among his kilt, lederhosen and grass skirt. He decides to weigh these alternatives using AHP and has decided that comfort, style, and ease of use are the most important criteria.

His pairwise comparison matrices are as follows:

 Comfort Kilt Lederhosen Grass Skirt Kilt 1 4 7 Lederhosen 1 3 Grass Skirt 1

 Style Kilt Lederhosen Grass Skirt Kilt 1 0.5 0.125 Lederhosen 1 5 Grass Skirt 1

 Ease of Use Kilt Lederhosen Grass Skirt Kilt 1 3 7 Lederhosen 1 5 Grass Skirt 1

 Factor Comfort Style Ease of Use Comfort 1 0.125 .25 Style 1 3 Ease of Use 1

68) Use Table M1-5 to compute the normalized matrix for the three factors.

 Factor Comfort Style Ease of Use Comfort 0.0769 0.0857 0.0588 Style 0.6154 0.6857 0.7059 Ease of Use 0.3077 0.2286 0.2353

Diff:  Moderate

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

69) Using Table M1-5, what are the total weighted evaluations for the three options for attire?

 Attire Priority Kilt 0.276 Lederhosen 0.197 Grass skirt 0.527

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

70) Using Table M1-5, what is the consistency ratio for the comfort factor?

Answer:  CR = 0.01163/0.58 = 0.0281

Diff:  Difficult

Topic:  ANALYTIC HIERARCHY PROCESS

LO:  M1.2: Understand the use of analytic hierarchy process in decision making.

AACSB:  Analytical thinking

Classification:  Application

Quantitative Analysis for Management, 13e (Render et al.)

Module 3  Decision Theory and the Normal Distribution

1) The binomial distribution can be used when there are a small number of states of nature and/or alternatives.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

2) Cost volume analysis deals only with costs while break-even analysis deals with both costs and revenues.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

3) σ describes the dispersion or spread of the normal distribution.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

4) When computing Z for a break-even analysis: as σ increases, Z decreases.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

5) In many business break-even analyses, the normal distribution can be used to estimate demand.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

6) If a variable other than demand is random (price, fixed or variable cost, etc.) the problem of break-even analysis becomes much more complex.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

7) Using EOL requires one to identify the loss per unit when sales are below the break-even point.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept

8) The unit normal loss integral can be used to compute EOL.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept

9) EVPI and minimum EOL are equivalent.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept

10) In determining the EOL with the normal distribution, as D increases, the unit normal loss integral, N(D), also increases.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept

11) σ has a greater impact on the shape of the normal distribution than μ.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

12) μ has a greater impact on the shape of the normal distribution than σ.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

13) In a normal distribution, there is a greater chance of seeing an observation one standard deviation above the mean than one standard deviation below the mean.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

14) A positive Z score for customer demand means that the company will realize a profit.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

15) A Z score of 0.5 means that the observation equals the mean.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

16) In many business decisions, there are numerous states of nature and/or alternatives. These problems are best handled by

1. A) constructing a large decision table and using Excel.
2. B) constructing a large decision tree.
3. C) using the normal distribution.
4. D) using the integral loss distribution.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

17) The price/unit minus the variable cost/unit is

1. A) per unit profit.
2. B) the break-even point.
3. C) the Z value.
4. D) EOL.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

18) If fixed costs were to double unexpectedly, the break-even point would be

1. A) unaffected.
2. B) doubled.
3. C) halved.
4. D) increased by a factor of four.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

19) If the price/unit were doubled at the same time that the variable cost/unit doubled, the break-even point would be

1. A) unaffected.
2. B) doubled.
3. C) halved.
4. D) increased by a factor of four.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

20) If variable cost/unit falls, the fixed cost rises, and the selling price/unit remains constant, the break-even point

1. A) stays the same.
2. B) decreases.
3. C) increases.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

21) Loss/unit when sales are below the break-even point is equal to

1. A) (total revenue – total cost)/number of units.
2. B) selling price.
3. C) price/unit minus variable cost per unit.
4. D) EOL.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

22) If the break-even volume doubles, this suggests that

1. A) variable cost has increased.
2. B) fixed cost has increased.
3. C) selling price has decreased.
4. D) the variable or fixed costs have increased or selling price has decreased.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

23) If the fixed costs are \$10,000 and the variable cost/unit is \$10 and the break-even is 100 units, what is the selling price per unit?

1. A) \$200.
2. B) \$110.
3. C) \$59.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

24) The Truck Toys Company manufactures traditional wooden toy trucks. It has determined its variable cost/unit to be \$1.50/truck. Fixed costs, however, are quite high because old equipment is used in the manufacturing process and costly packaging is needed to market the toy trucks. The fixed costs are estimated at \$11,000/month. The company sells their toy trucks at a price of \$7.75/each. How many toy trucks must be sold annually to break even?

1. A) 1,760 toy trucks
2. B) 5,500 toy trucks
3. C) 21,120 toy trucks
4. D) 1,879 toy trucks

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

25) Harry Sprague makes custom bowling balls. His fixed cost is \$255,000, variable cost is \$45.50, and selling price is \$55.50. To what value must he reduce his variable cost if he wants a break-even point of 10,000 units?

1. A) \$39
2. B) \$37
3. C) \$35
4. D) \$30

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

26) When using the normal distribution to approximate demand, which of the following is not true?

1. A) We assume demand is normally distributed.
2. B) We assume demand is a random variable.
3. C) We assume 50 percent of the time demand is less than the mean.
4. D) We assume the fixed cost follows a normal distribution.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

27) Demand is estimated to be 800 units. If Z is taken to be 1.5, when the estimated average demand is 400 units, determine σ for these data.

1. A) 71,111
2. B) -71,111
3. C) 266
4. D) -266

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

28) Tony B. is attempting to start a landscaping business. He estimates that to break even, he will need about 150 customers. He believes that he will lose approximately \$500 per customer for each customer fewer than the 150. At the moment, he believes there is an 80% probability that he will be able to secure between 130 and 170 customers, and that there is a 50/50 chance that demand will be greater than 160 customers. What is the mean or expected number of sales?

1. A) 130
2. B) 150
3. C) 160
4. D) 170

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

29) If the fixed costs are \$15,000 and the variable cost/unit is \$35 and the break-even is 100 units, what is the selling price per unit?

1. A) \$185
2. B) \$110
3. C) \$65
4. D) \$130

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

30) If the fixed costs are \$15,000 and the variable cost/unit is \$35 and the selling price is \$375 units, what is the break-even?

1. A) \$38.18
2. B) \$40.22
3. C) \$42.16
4. D) \$44.12

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

31) If the fixed costs are \$25,000 and the variable cost/unit is \$35 and the selling price is \$375 units, what is the break-even?

1. A) 67.50
2. B) 69.25
3. C) 71.75
4. D) 73.50

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

32) A food truck sells an average of 1240 black bean lattes with a standard deviation of 80. What level of customer demand represents the 15th percentile for black bean lattes?

1. A) 1066
2. B) 1157
3. C) 1183
4. D) 1204

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

33) An Asian fusion cafe sells an average of 1240 wasabi lattes with a standard deviation of 80. What level of customer demand represents the 65th percentile for wasabi lattes?

1. A) 1209
2. B) 1253
3. C) 1271
4. D) 1293

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

34) For volumes greater than the break-even point, the opportunity loss function is

1. A) a function of K, the loss per unit.
2. B) 0.
3. C) dependent on how much the volume is greater than the break-even point.
4. D) halved.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept

35) The opportunity loss function gives us information about

1. A) the variable costs we should expect to incur.
2. B) cost and revenues as a function of demand.
3. C) the number of products we should expect to sell.
4. D) profits lost if demand is less than the break-even point.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept

36) Given the following opportunity loss function, determine the loss when 1,100 units are sold.

Opportunity loss = 3 (1,000 – X) for X ≤ 1,000, otherwise 0.

1. A) 0
2. B) -300
3. C) 300
4. D) 3

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

37) Given the following opportunity loss function, determine the loss when 600 units are sold.

Opportunity loss = 2 (600 – X) for X ≤ 600, otherwise 0.

1. A) 2
2. B) 600
3. C) 1,200
4. D) 0

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

38) Given the following opportunity loss function, determine the loss when 400 units are sold.

Opportunity loss = 3 (1,000 – X) for X ≤ 1,000, otherwise 0.

1. A) 1,200
2. B) 600
3. C) 3
4. D) 1,800

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

39) Given the following opportunity loss function, determine the loss when 500 units are sold.

Opportunity loss = 2 (600 – X) for X ≤ 600, otherwise 0.

1. A) 200
2. B) 600
3. C) 1,200
4. D) 0

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

40) Given the following opportunity loss function, determine the loss when 400 units are sold.

Opportunity loss = 5 (800 – X) for X ≤ 800, otherwise 0.

1. A) -1,200
2. B) 2,000
3. C) 0
4. D) 1,800

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

41) To determine the EOL with the normal distribution

1. A) one must compute D.
2. B) one must compute Z.
3. C) one must use the standard normal table.
4. D) one must know the EVPI.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept

42) If D = 1.00, then N(1.00) is approximately

1. A) 0.69000.
2. B) 1.00000.
3. C) 0.08332.
4. D) 0.35090.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

43) If D = 1.01, s = 900, K = 10, and the selling price is \$11, the EOL is

1. A) ≅ 10,000.
2. B) ≅ 9,100.
3. C) ≅
4. D) ≅

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

44) Tony B. is attempting to start a landscaping business. He estimates that to break even, he will need about 140 customers. He believes he will lose approximately \$500 per customer for each customer fewer than the 140. At the moment, he believes that there is an 80% probability that he will be able to secure at least 130 customers and that there is a 50/50 chance that demand will be greater than 150 customers. He has several marketing research firms offering (for a price, of course) to conduct a survey that will provide additional information regarding the probability of demand. How much should he be willing to spend if he decides to have a survey made?

1. A) ≅ \$4,000
2. B) ≅ \$3,000
3. C) ≅ \$5,000
4. D) ≅ \$2,700

Diff:  Difficult

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

45) The computed EOL will be the same as the computed

1. A) EMV.
2. B) unit normal loss.
3. C) break-even point.
4. D) EVPI.

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept

46) Which of these statements is best?

1. A) P(loss) = P(break-even < demand).
2. B) P(profit) = P(demand > break-even).
3. C) The mean of a distribution is less than or equal to the expected value of the distribution.
4. D) As σ increases, the spread of a distribution decreases.

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

47) The IRU Company manufactures traditional wooden pencils. They have determined their variable cost/unit to be \$0.012/pencil. Fixed costs, however, are quite high because of old processing equipment and costly packaging. The fixed costs are estimated at \$140,000/month. IRU sells their pencils at a price of \$13.248/gross. (There are 144 pencils in a gross.) How many grosses of pencils must be sold annually to break even?

Answer:  selling price/pencil = 13.248/144 = 0.092 \$/pencil

break-even point = 140,000/(0.092 – 0.012) = 1,750,000 pencils/month = 145,833 gross/year

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

48) Jack Spratt makes candlesticks. His fixed cost is \$5,000, variable cost is \$3.50, and selling price, \$8.50. To what value must he reduce his variable cost if he wants a break-even point of 900 units?

Answer:  Variable cost = (900 * 8.50 – 5,000)/900 = \$2.94

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

49) The break-even point was determined to be 3,000 units/month. Next month begins an increased lease payment for the production facility. The overall effect will be to increase the fixed costs by 10%. How will the break-even point be affected?

Answer:  break-even point(NEW) = break-even point(OLD) (1.1) = 3,300

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

50) Don Loprie takes out tiny classified ads in newspapers across the nation. His fixed cost is \$13,000, variable cost is \$25.50, and selling price, \$38.75. To what value must he reduce his variable cost if he wants a break-even point of 900 units?

Answer:  Variable cost = (900 * 38.75 – 13,000)/900 = \$24.3056

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

51) In accordance with their government contract, the break-even point was determined to be 5,000 units/month. Next month begins an increased lease payment for the production facility such that the fixed cost rises to \$13,000. If the selling price is \$38.75, what is the variable cost?

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

52) If the break-even point was estimated to be 500 units when fixed costs are estimated at \$1,200/month, what would the EMV be if average demand is estimated at 750?

Answer:  500 = 1,200/(P – V), therefore (P – V) = 2.4 EMV = (2.4)(750) – (1,200) = 600

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

53) Average demand is estimated at 1,200 units/month. It is believed there is a 20% chance for demand to be higher than 1,800. Determine the μ and σ of a normal distribution that estimates demand.

Answer:  μ = 1200, σ = (1,800 – 1,200)/(0.84) = 714

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Application

54) Given the following opportunity loss function, determine the loss when 7,000 units are sold. Opportunity loss: 6(9,000 – X) for X ≤ 9,000.

Answer:  OL = 6(9,000 – 7,000) = 12,000

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

55) Given the following opportunity loss function, determine the loss when 5,000 units are sold. Opportunity loss: 6.5(8,000 – X) for X ≤ 9,000.

Answer:  OL = 6.5(8,000 – 5,000) = 19,500

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

56) Determine N(D) for the following D values: 0.01, 0.21, 0.77, and 1.20.

Answer:  N(D) = 0.3940, 0.3027, 0.1267, 0.05610

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

57) If D = 0.75, s = 500, K = 6, and the selling price/unit = 5, determine EOL.

Answer:  EOL = Kσ N(D) = 6 (500) N(0.75) = 6 (500)(0.1312) = 394

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

58) The sales team projects that the annual demand for their new and improved Mediocrity Plus™ product will be normally distributed with a mean of 143,000,000 units and a standard deviation of 27,500,000. The break-even point is 123,000,000 units and for each unit sold less that that number, the company will lose \$875. What is the expected opportunity loss?

Answer:  EOL = Kσ N(D) = \$875(27,500,000)(0.1381) = \$3,323,031,250

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

59) The parfumerie at Amour Fou projects that the annual worldwide demand for their new fragrance Odeur de Fromage will be normally distributed with a mean of 122 units and a standard deviation of 44. The break-even point is 100 units, and for each unit sold less than that number, the company will lose \$750. What is the expected opportunity loss?

Answer:  EOL = Kσ N(D) = \$750(44)(0.1978) = \$6,527

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Application

60) break-even analysis answers what common management question?

Answer:  At what point do revenues equal costs?

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

61) In terms of fixed costs, variable cost/unit, and the selling price/unit, what is the break-even point?

Answer:  break-even point = fixed cost / (selling price/unit – variable cost/unit)

Diff:  Moderate

Topic:  BREAK-EVEN ANALYSIS AND THE NORMAL DISTRIBUTION

LO:  M3.1: Understand how the normal curve can be used in performing break-even analysis.

AACSB:  Analytical thinking

Classification:  Concept

62) Briefly describe the opportunity loss function.

Answer:  a function that relates opportunity loss in dollars to sales in units

Diff:  Moderate

Topic:  EXPECTED VALUE OF PERFECT INFORMATION AND THE NORMAL DISTRIBUTION

LO:  M3.2: Compute the expected value of perfect information using the normal curve.

AACSB:  Analytical thinking

Classification:  Concept