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IIA IIA-CIA-Part3 Exam
Certified Internal Auditor - Part 3, Business Analysis and Information Technology (Page 16 )

Updated On: 19-Jan-2026
Page 16 of 312
PDF with 1555 Questions

Only two companies manufacture Product A. The finished product is identical regardless of which company manufactures it. The cost to manufacture Product A is US$1, and the selling price is US $2. One company considers reducing the price to achieve 100% market share but fears the other company will respond by further reducing the price. Such a scenario would involve a:

  1. No-win strategy.
  2. Dual-win strategy.
  3. One win-one lose strategy.
  4. Neutral strategy.

Answer(s): A

Explanation:

If both firms reduce the selling price of Product A, neither will gain sales and the resultant price war will cause both firms to earn lower profits. This outcome is inevitable when reduced profit margins do not result in a significant increase in sales. This is classified as a no-win strategy.



The decision rule that selects the strategy with the highest utility payoff if the worst state of nature occurs is the:

  1. Minimize regret rule.
  2. Maximize utility rule.
  3. Maximinrule.
  4. Maximaxrule.

Answer(s): C

Explanation:

The maximin rule determines the minimum payoff for each decision and then chooses the decision with the maximum minimum payoff. It is a conservative criterion adopted by risk-averse players, that is, those for whom the disutility of a loss exceeds the utility of an equal gain.



Your company (Company Y) has decided to enter the European market with one of its products and is now considering three advertising strategies. This market currently belongs to Company X. Company X is aware that your company is entering the market and is itself considering steps to protect its market. An analyst for your company has identified three strategies Company X might develop and has shown the payoffs for each in the tables below.


The analyst has formulated this problem as a:

  1. Zero-sum game.
  2. Cooperative game.
  3. Prisoner's dilemma.
  4. Game against nature.

Answer(s): A

Explanation:

Game theory is a mathematical approach to decision making when confronted with an enemy or competitor. Games are classified according to the number of players and the algebraic sum of the payoffs. In a two-player game, if the payoff is given by the loser to the winner, the algebraic sum is zero, and the game is a zero-sum game; if it is possible for both players to profit, the game is a positive-sum game. In this situation, the sum of the payoffs for each combination of strategies is zero. For example, if X takes no action and Y chooses limited advertising, X's payoff is -1 and Ys is 1.



If the bank uses the maximax criterion for selecting the location of the branch, it will select:

  1. L1.
  2. L2.
  3. L3.
  4. L5.

Answer(s): D

Explanation:

Risk-seeking, optimistic decision makers employ the maximax criterion. It is the strategy with the highest potential payoff, regardless of the state of nature. In this case, it is location L5 (US $29). "



A bank plans to open a branch in one of five locations (labeled L1, L2, L3, L4, L5). Demand for bank services may be high, medium, or low at each of thes e locations Profits for each location- demand combination are presented in the payoff matrix.


If the bank uses the minimax regret criterion for selecting the location of the branch. it will select:

  1. LI
  2. L2.
  3. L3.
  4. L5.

Answer(s): B

Explanation:

Under the minimax regret criterion, the decision maker selects the choice that minimizes the maximum regret (opportunity cost). The maximum regret for each location is determined from the opportunity loss matrix.



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