8 Quantitative Business Decision Making Free Online FlashCards

What four elements frame a business decision?

Specify the available alternatives, possible states of the world, consequences, and the objective and constraints.

Which costs belong in an incremental comparison?

Include costs and benefits that differ between alternatives. Exclude sunk costs because they cannot be recovered.

How is an alternative’s expected value calculated?

It is the probability-weighted average payoff: $EV(a)=\sum_{i=1}^{k}p_iV(a,s_i)$, where each state’s payoff is weighted by its probability.

What conditions must state probabilities satisfy?

They must each be nonnegative and sum to $1$.

What does expected value say about one decision’s outcome?

It is a long-run average across comparable decisions, not a promise about the outcome of any single decision.

How are choices compared using a decision tree?

Calculate expected values at chance points, then work backward through the tree to compare choices.

Why might a firm reject the highest expected monetary value?

A limited-cash firm may avoid a small chance of severe loss even when an option has higher expected monetary value.

At what high-demand probability is expansion preferred?

Expansion is preferred only when $p>\frac{65}{140}$, about $0.464$. A plausible estimate change across this threshold makes the recommendation sensitive.

What is EVPI in the capacity decision example?

EVPI is the expected payoff with perfect advance knowledge minus the best expected payoff without it. In the example, it is $63-33=30$ thousand dollars.

When is the median less affected than the mean?

The median is less affected by unusually large or small values.

What can undermine an estimate from a sample?

Nonresponse, selection effects, small samples, or changing conditions can make a precise-looking estimate misleading.

What does a small p-value indicate?

Under the test assumptions, it is evidence against the null hypothesis—not the probability that the null is true or a measure of effect size.