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Questions and Answers
According to the table, which quantity demanded yields the highest average outcome?
According to the table, which quantity demanded yields the highest average outcome?
- D2=288
- D0=240
- D1=264
- D3=312 (correct)
Based solely on the provided data, selecting a supply quantity of 288 shirts is considered the safest choice due to its lower volatility.
Based solely on the provided data, selecting a supply quantity of 288 shirts is considered the safest choice due to its lower volatility.
True (A)
What are the two different choices mentioned when the probabilities of each outcome are known or can be estimated?
What are the two different choices mentioned when the probabilities of each outcome are known or can be estimated?
- Maximum Likelihood and Expected Value (correct)
- Expected Value and Laplace Criterion
- Volatility Assessment and Average Outcome
- Laplace Criterion and Maximum Likelihood
In the context of decision-making, what does knowing the probabilities of each outcome allow for?
In the context of decision-making, what does knowing the probabilities of each outcome allow for?
When outcome probabilities are known, two different choices for decision selection are ________ _______ and Expected Value.
When outcome probabilities are known, two different choices for decision selection are ________ _______ and Expected Value.
According to the table, what is the expected value (EV) if the quantity supplied is 288?
According to the table, what is the expected value (EV) if the quantity supplied is 288?
If the likelihood of D2=288 is 0.40 and the quantity supplied is S1=264, the outcome is 7920.
If the likelihood of D2=288 is 0.40 and the quantity supplied is S1=264, the outcome is 7920.
In the context of maximizing profit, what does 'EV' stand for?
In the context of maximizing profit, what does 'EV' stand for?
To calculate the EV for each supply option, you sum over all possible outcomes the probability of each outcome occurring times the ______.
To calculate the EV for each supply option, you sum over all possible outcomes the probability of each outcome occurring times the ______.
If a company aims to choose the supply quantity that maximizes expected profit, which quantity should they supply based solely on the EVs provided?
If a company aims to choose the supply quantity that maximizes expected profit, which quantity should they supply based solely on the EVs provided?
Under the maximax criterion, which quantity of shirts would the company produce, and what profit would they make if the team wins all games (D3)?
Under the maximax criterion, which quantity of shirts would the company produce, and what profit would they make if the team wins all games (D3)?
Which decision-making approach focuses on minimizing the worst possible outcome?
Which decision-making approach focuses on minimizing the worst possible outcome?
The maximin criterion suggests selecting the option that guarantees the highest possible profit, regardless of the outcome.
The maximin criterion suggests selecting the option that guarantees the highest possible profit, regardless of the outcome.
If a company chooses to produce 288 shirts, what is the range of possible profits they could make based on the demand scenarios provided?
If a company chooses to produce 288 shirts, what is the range of possible profits they could make based on the demand scenarios provided?
When probabilities are unknown, an approach is to take the ______ of outcomes and pick the highest one.
When probabilities are unknown, an approach is to take the ______ of outcomes and pick the highest one.
Which of the following is the PRIMARY reason it is important to understand how organizations make decisions?
Which of the following is the PRIMARY reason it is important to understand how organizations make decisions?
A payoff table combines possible future choices into a table.
A payoff table combines possible future choices into a table.
A company is trying to decide how many shirts to produce for an upcoming event. Using the maximax criterion, which production quantity should they choose based solely on the provided payoff table?
A company is trying to decide how many shirts to produce for an upcoming event. Using the maximax criterion, which production quantity should they choose based solely on the provided payoff table?
A company uses the maximin criterion to make decisions. How would producing 240 shirts be evaluated based on the payoff table?
A company uses the maximin criterion to make decisions. How would producing 240 shirts be evaluated based on the payoff table?
In the single-stage decision-making process, what is the purpose of developing a payoff table?
In the single-stage decision-making process, what is the purpose of developing a payoff table?
Decision theory is an analytic framework for decision-making under conditions of ______.
Decision theory is an analytic framework for decision-making under conditions of ______.
The LaPlace criterion involves assigning equal probabilities to each possible demand level and then calculating the expected profit for each supply quantity.
The LaPlace criterion involves assigning equal probabilities to each possible demand level and then calculating the expected profit for each supply quantity.
Briefly explain how unsold shirts affect the total profit in the calculations.
Briefly explain how unsold shirts affect the total profit in the calculations.
LaPrade Manufacturing needs to decide how many shirts to manufacture. The profit per shirt is $30, and the loss per unsold shirt is $10. What does $30 represent in this scenario?
LaPrade Manufacturing needs to decide how many shirts to manufacture. The profit per shirt is $30, and the loss per unsold shirt is $10. What does $30 represent in this scenario?
The optimistic decision criterion is also known as the ________ criterion.
The optimistic decision criterion is also known as the ________ criterion.
Which of the following is the first step in the decision-making process?
Which of the following is the first step in the decision-making process?
Match the step of the decision making process to its description
Match the step of the decision making process to its description
Match each decision criterion with its primary focus:
Match each decision criterion with its primary focus:
In decision theory, what is the significance of analyzing different 'states of the world'?
In decision theory, what is the significance of analyzing different 'states of the world'?
What is the initial step in decision-making when determining how many shirts to produce?
What is the initial step in decision-making when determining how many shirts to produce?
In the example calculation, what is the loss incurred for each unsold shirt?
In the example calculation, what is the loss incurred for each unsold shirt?
Flashcards
Maximax Criterion
Maximax Criterion
An optimistic decision-making approach that selects the alternative with the highest possible payoff.
Maximin Criterion
Maximin Criterion
A pessimistic decision-making approach that selects the alternative with the best of the worst possible payoffs.
Quantity Supplied
Quantity Supplied
The quantity of goods or services that producers are willing and able to sell at a given price and time.
Quantity Demanded
Quantity Demanded
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Average Outcome Criterion
Average Outcome Criterion
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Decision-Making Importance
Decision-Making Importance
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Decision Theory
Decision Theory
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Payoff Table
Payoff Table
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Decision-Making Steps
Decision-Making Steps
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One-Stage Decision Steps
One-Stage Decision Steps
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Expected Value
Expected Value
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States of the World
States of the World
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Pay-off Regret Table
Pay-off Regret Table
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Laplace Criterion
Laplace Criterion
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Maximum Likelihood
Maximum Likelihood
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Possible Future Outcomes (Demanded)
Possible Future Outcomes (Demanded)
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Possible Future Choices (Supply)
Possible Future Choices (Supply)
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Optimistic Criterion
Optimistic Criterion
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Total Profit Calculation
Total Profit Calculation
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Highest Probability Outcome
Highest Probability Outcome
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Expected Value (EV)
Expected Value (EV)
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EV Maximization
EV Maximization
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Study Notes
- Module 3 covers risk, reward, and organizational decision-making
- Recognizes importance to understanding how organizations make decisions
- Recalls the single-stage decision-making process
- Identifies why expected value is the most common decision criteria organizations use
Decision Theory
- Provides a formal analytic framework for decision-making under uncertainty
- Determines optimal strategies when a decision-maker faces alternatives and uncertain future events
Steps of Decision-Making Process
- Determine all possible future outcomes (states of the world)
- Determine all future choices (decisions) the organization can make
- Combine outcomes and choices into a matrix (payoff table)
- Select the choice from the menu in Step 2 that fulfills some decision criteria
One-Stage Decision-Making Problems
- Identify courses of action when facing possible events
- Develop a pay-off regret table = matrix of conditional values associated with combinations of acts and events
- Choose a course of action according to some principle
Decision-Making Example: LaPrade Manufacturing
- It must decide how many shirts to manufacture
- Profit p/shirt: $30
- Loss p/unsold shirt: $10
- Annual demand for shirts: between 240 and 312 copies
Step #1: Determine All Possible Future Outcomes
- D0: 240 shirts demanded
- D1: 262 shirts demanded
- D2: 288 shirts demanded
- D3: 312 shirts demanded
Step #2: Determine All Future Choices
- Q0: Make 240 shirts
- Q1: Make 264 shirts
- Q2: Make 288 shirts
- Q3: Make 312 shirts
Step #3: Pay-off Table (Combining Outcomes and Choices)
- Table shows all choices from SO=240 to S3=312 and the associated revenues
Example Calculations
- Total Profit, 240 shirts made X $30 profit p/shirt = $7,200
- Total Profit, (240 shirts made X $30 profit p/shirt) – (24 unsold shirts X $10 loss p/unsold shirt) = $7,200 - $240 = $6,960
Step #4: Select the Choice
- Other decision criteria include: Maximax Criterion, Maximin Criterion, LaPlace Criterion
Maximax Criterion
- Looks at the maximum payoff for each choice and selects the highest one
- Company would make 312 shirts
- If the team wins all games, it makes $9,360
Maximin Criterion
- Looks at the minimum payoff for each choice and pick the highest one
- Company would make 240 shirts, regardless of how many games the team wins, making $7,200
Laplace Criterion
- If probabilities are unknown, it takes the average of outcomes and picks the highest one
- Company makes 288 shirts, which balances maximum profit against volatility (safer-choice)
Step #4 Revisited
- Seeks to know/estimate probabilities of outcomes occurring, different choices
Maximax Likelihood
- Find the outcome with the highest probability of occurring
- Select the quantity that maximizes the profit tied to that outcome
Expected Value
- Calculate EV for each supply option and select the one with the highest EV
- EV equals the sum over all possible outcomes, of the probability of each outcome occurring times the outcome
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Description
Explores the basics of organizational decision-making, focusing on risk, reward, and the single-stage decision-making process. Includes determining future outcomes, choices, payoff tables, and decision criteria. Expected value is highlighted as a common decision criterion.
