- 3.17: Solution
- The type of decision Ken facing is decision under uncertainty
- The decision criterion that he should use is the Maximax
- The best alternative is that he should choose Sub100, since it has the best possible outcome
- 3.19: (Use Excel)
- The decision model that should be used is Ken Brown should actually use the Maximize Expected Monetary Value (EMV) model.
- The optimal decision is being the probabilities in the favorable market are seventy percent and thirty percent in unfavorable markets trust the optimal decision would be sub 100 reason being the EMV is (300,00*.70+(-200,000*.30)=150,000. As opposed to 145,000 and 47,100.
Solving for value x:
0.70x – 200,000(0.30) = 145,000
0.70x – 60,000 = 145,000
0.70x = 205,000
205,000 / 0.70 = 292,857, Answer: $292,857 (or $7,143 lower)
- 3.24: Solution
- Opportunity loss table
|STRONG MARKET||FAIR MARKET||POOR MARKET||Maximum Opp. Loss|
The best option using the opportunity loss table would, therefore, be to invest in a small facility, as it would lead to the least amount of loss in the worst case scenario.
- b) Similarly if using the minimax regret rule, in an attempt to remain risk neutral, the investor is likely to chose the scenario that results in the least amount of loss, with a small facility meeting such a criteria. The best choice under this rule would therefore, be to invest in a small facility, especially if one assumes that maximum regret is likely to occur for all the available options.
- 3.26: Solution
|demand||profit||expected profit||profit||expected profit||profit||expected profit||profit||expected profit|
I believe that through production of 8 cases of cheese will definitely provide the maximum total expected profit that is ($352.50)
- 3.36 Solution
If John maximizes his expected utility his decision is likely to be geared towards investing in a small plant before carrying out a survey, as the probability of better returns are higher than if he chose not to carry out a survey but invested in a large plant. As such, should Thompson choose to maximize on his utility, and take greater chances, despite the odds being less sure if compared with a scenario in which a survey has been carried out. The biggest motivating factor would be the likely higher return.
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