CMA Intermediate · Management Accounting · Decision Theory
A Chennai firm has three alternatives with payoffs (Rs. thousand) under two states of nature: Alternative X: 80 (Boom), 20 (Slump); Y: 60 (Boom), 40 (Slump); Z: 50 (Boom), 45 (Slump). Probability of Boom is 0.4 and Slump is 0.6. Which alternative has the highest expected monetary value (EMV) and what is it?
Alternative Y has the highest EMV of Rs. 48 thousand. Weighting payoffs by probabilities gives X 44, Y 48 and Z 47. Since Y yields the largest probability-weighted payoff, it is chosen under the EMV criterion.
- AX with EMV Rs. 44 thousand
- BY with EMV Rs. 48 thousandCorrect
- CZ with EMV Rs. 47 thousand
- DY with EMV Rs. 50 thousand
Explanation
EMV(X) = 0.4x80 + 0.6x20 = 32+12 = 44. EMV(Y) = 24+24 = 48. EMV(Z) = 20+27 = 47. The highest is Y at 48. Z is close but lower; using equal probabilities would give Y 50, which is wrong here.
Did you get it right without looking?
One question tells you little. A timed set on Decision Theory shows your real accuracy, how long you take and where you lose marks.
More Decision Theory questions
- A decision-maker faces three acts with the following payoffs (in Rs lakh) under three states of nature. A1: 40, 25, 10; A2: 30, 30, 20; A3: …
- Kaveri Traders expects a festival-season order to yield a profit of ₹40,000 with probability 0.3, ₹20,000 with probability 0.5 and a loss of…
- Two acts are compared in two states. Act A pays ₹100 thousand in S1 and ₹20 thousand in S2. Act B pays ₹50 thousand in S1 and ₹70 thousand i…
- Under a decision with EMV of the best action Rs. 46 lakh and expected payoff under perfect information Rs. 52.5 lakh, what is the EVPI, and …
- Meera Exports faces two options. Option X gives Rs 80,000 with probability 0.7 and Rs 20,000 with probability 0.3. Option Y gives a certain …
- A decision maker uses the Hurwicz criterion with a coefficient of optimism of 0.6. Best and worst payoffs (₹ lakh) are: A = 90 and 10; B = 7…