Western Governors University (WGU) BUS3100 C723 Quantitative Analysis for Business Practice Exam

The expected payoff is calculated by multiplying the potential value of an outcome by the probability of that outcome occurring. This method allows decision-makers to quantify the potential benefits of different alternatives, taking into account not just the value of those alternatives but also how likely each outcome is to happen. This approach is grounded in probability theory, as it provides a systematic way to weigh risks and rewards, enabling more informed and rational decision-making.

For example, if you have a business strategy that could lead to a profit of $100,000 with a 70% probability, the expected payoff would be calculated as $100,000 multiplied by 0.7, which results in an expected value of $70,000. This allows businesses to compare different strategies or choices not just based on their highest possible outcomes but on their expected returns, considering the associated risks.

The other choices refer to different aspects of decision analysis. Averaging potential outcomes does not take into account the differentiating probabilities associated with each outcome; ranking decision criteria focuses on the relative importance of different aspects of the decisions rather than numerical payoffs; and establishing decision alternatives is an essential first step before calculating expected payoffs but does not itself lead to assessing the payoffs directly.