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# Payoff Tables and Decision Trees; Control Charts; Bayes Theorem; Total Quality Management ( Demings 14 Points of Management ), Expected Monetary Value and Red Bead Experiment

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1. A tabular presentation that shows the outcome for each decision
alternative under the various states of nature is called a:
a. payback period matrix.
b. decision matrix.
c. decision tree.
d. payoff table.

2. The difference between expected payoff under certainty and
expected value of the best act without certainty is the expected:
a. monetary value.
b. net present value.
c. value of perfect information.
d. rate of return.

3. A company that manufactures designer jeans is contemplating
whether to increase its advertising budget by \$1 million for next
year. If the expanded advertising campaign is successful, the
company expects sales to increase by \$1.6 million next year. If the
advertising campaign fails, the company expects sales to increase by
only \$400,000 next year. If the advertising budget is not increased,
the company expects sales to increase by \$200,000. Identify the
outcomes in this decision-making problem.

a. Two choices: (1) increase the budget and (2) do not increase
the budget.
b. Two choices: (1) campaign is successful and (2) campaign is
not successful.
c. Four consequences resulting from the Increase/Do Not
Increase and Successful/Not Successful combinations.
d. The increase in sales dollars next year.

4. Table 4.1
The following payoff table shows profits associated with a set of 3
alternatives under 2 possible states of nature.

States A1 A2 A3
1 12 -2 8
2 4 10 5
where: S1 is state of nature 1 A1 is action alternative 1
S2 is state of nature 2 A2 is action alternative 2
A3 is action alternative 3
Referring to Table 4.1, the opportunity loss for A2 when S1 occurs is
a. -2
b. 0
c. 5
d. 14
5. Referring to Table 4.1, if the probability of S1 is 0.4, then the
probability of S2 is
a. 0.4
b. 0.5
c. 0.6
d. 1.0

6. Referring to Table 4.1, if the probability of S1 is 0.2 and S2 is 0.8,
then the expected opportunity loss (EOL) for A1 is
a. 0
b. 1.2
c. 4.8
d. 5.6

7. Referring to Table 4.1, if the probability of S1 is 0.5, then the
expected monetary value (EMV) for A1 is
a. 3
b. 4
c. 6.5
d. 8

8. Blossom's Flowers purchases roses for sale for Valentine's Day. The
roses are purchased for \$10 a dozen and are sold for \$20 a dozen.
Any roses not sold on Valentine's Day can be sold for \$5 per dozen.
The owner will purchase 1 of 3 amounts of roses for Valentine's Day:
100, 200, or 400 dozen roses. The number of alternatives for the
payoff table is
a. 2
b. 3
c. 4
d. It cannot be determined from the information given.

9. Blossom's Flowers purchases roses for sale for Valentine's Day. The
roses are purchased for \$10 a dozen and are sold for \$20 a dozen.
Any roses not sold on Valentine's Day can be sold for \$5 per dozen.
The owner will purchase 1 of 3 amounts of roses for Valentine's Day:
100, 200, or 400 dozen roses. Given 0.2, 0.4, and 0.4 are the
probabilities for the sale of 100, 200, or 400 dozen roses,
respectively, then the EVPI for buying roses is
a. \$700
b. \$1,500
c. \$1,900
d. \$2,600

10. Table 4.2
The following payoff matrix is given in dollars:
Event Action A Action B
1 400 700
2 200 500
The coefficient of variation for Action A is
a. 12.8%
b. 33.3%
c. 133.33%
d. 333.33%

11. Referring to Table 4.2, the return to risk ratio for Action B is
a. 0.167
b. 3.0
c. 6.0
d. 9.0

12. Referring to Table 4.2, what is the optimal action using the EMV
criterion?
a. Action A
b. Action B
c. Either Action A or Action B
d. It cannot be determined from the information given.

13. For a potential investment of \$5,000, a portfolio has an EMV of
\$1,000 and a standard deviation of \$100. What is the coefficient of
variation?
a. 50%
b. 20%
c. 10%
d. 5%

14. The control chart
a. focuses on the time dimension of a system.
b. captures the natural variability in the system.
c. can be used for categorical, discrete, or continuous variables.
d. All of the above.

15. Variation signaled by individual fluctuations or patterns in the data
is called
a. special or assignable causes.
b. common or chance causes.
c. explained variation.
d. the standard deviation.

16. The principal focus of the control chart is the attempt to separate
special or assignable causes of variation from common causes of
variation. What cause of variation can be reduced only by changing
the system?
a. Special or assignable causes
b. Common causes
c. Total causes
d. None of the above

17. Once the control limits are set for a control chart, one attempts to
a. discern patterns that might exist in values over time.
b. determine whether any points fall outside the control limits.
c. Both of the above.
d. None of the above.

18. Which of the following situations suggests a process that appears to
be operating in a state of statistical control?
a. A control chart with a series of consecutive points that are
above the center line and a series of consecutive points that
are below the center line.
b. A control chart in which no points fall outside either the
upper control limit or the lower control limit and no patterns
are present.
c. A control chart in which several points fall outside the upper
control limit.
d. All of the above.

19. Which of the following is a moral of the red bead experiment?
a. Variation is part of the process.
b. Only management can change the system.
c. It is the system that primarily determines performance.
d. All of the above.

20. Table 4.3
A local newspaper has 10 delivery boys who each deliver the
morning paper to 50 customers every day. The owner decides to
record the percentage of papers delivered on time for a 10-day
period and construct a p chart to see whether the percentage is too
erratic.
Day Percentage of Papers
Delivered on Time
1 91.6
2 89.4
3 92.8
4 90.0
5 86.4
6 96.8
7 91.4
8 98.8
9 95.2
10 93.6

Referring to Table 4.3, what is the numerical value of the center line
for the p chart?
a. 0.926
b. 0.911
c. 0.885
d. 0.500

21. Table 4.4
A political pollster randomly selects a sample of 100 voters each day
for 8 successive days and asks how many will vote for the
incumbent. The pollster wishes to construct a p chart to see if the
percentage favoring the incumbent candidate is too erratic.

Sample (Day) Number Favoring
1 57
2 57
3 53
4 51
5 55
6 60
7 56
8 59

Referring to Table 4.4, what is the numerical value of the upper
control limit for the p chart?
a. 0.92
b. 0.89
c. 0.71
d. 0.62