4. Decision Analysis

Decision Trees — Quiz

Test your understanding of decision trees with 5 practice questions.

Practice Questions

Question 1

A company is considering investing in one of two projects, Project A or Project B. Project A has an initial cost of $100,000$. There is a $60\%$ chance of a high return of $250,000$ and a $40\%$ chance of a low return of $50,000$. Project B has an initial cost of $80,000$. There is a $70\%$ chance of a high return of $200,000$ and a $30\%$ chance of a low return of $30,000$. Which project should the company choose based on Expected Monetary Value (EMV)?

Question 2

In a complex decision tree, how does the concept of 'utility' extend beyond simple monetary value to influence optimal decision-making?

Question 3

When performing rollback analysis on a decision tree, what is the strategic implication of evaluating from right to left?

Question 4

A pharmaceutical company is deciding whether to proceed with a new drug trial. The decision tree involves an initial decision node, followed by a chance node for trial success/failure, and then another decision node for marketing/abandoning the drug. If the trial succeeds (probability $0.7$), the company can market the drug (profit $500$ million) or abandon it (profit $0$). If the trial fails (probability $0.3$), the company must abandon it (loss $100$ million). The cost of the trial is $50$ million. What is the expected value of proceeding with the drug trial?

Question 5

Consider a decision tree where a decision node is followed by two chance nodes, each leading to terminal outcomes. What is the most effective method for determining the optimal path through this structure?