2.2d - Decision Trees

Question 1

Decision tree definition

Answer 1

A model of the options available in a decision

Question 2

Expected value formula

Answer 2

Probability X expected pay-off

Question 3

Net gain formula

Answer 3

EV - initial cost

Question 4

What do squares represent in decision trees?

Answer 4

Decisions

Question 5

What do circles represent in decision trees?

Answer 5

Uncertain outcomes

Question 6

Advantages of decision trees:

Answer 6

• Sets out the problem clearly
• Considers opportunity costs
• Allows comparisons to be made

Question 7

Disadvantages of decision trees:

Answer 7

• Difficult to get accurate data
• Estimates may be unreliable
• Data may be historical
• Doesn’t include qualitative factors

Question 8

Strategic decision definition

Answer 8

Decisions concerned with the general direction of the business

Question 9

Tactical decision definition

Answer 9

Decisions concerned with specific areas or functions