02 Jun Question Chapter 3 Assignment These problems are adapted from problems in the textbook.
Question
Chapter 3 Assignment
These problems are adapted from problems in the textbook.
Each of the twelve lettered parts carries equal weight.
**You must show work and give an explanation for each answer.**
1. Susan Solomon is thinking about starting her own independent gasoline station. Susan’s problem is to decide how large her station should be. After a careful analysis, Susan developed the following table:
Size of Station
Good Market $
Fair Market $
Poor Market $
Small
50,000
20,000
-10,000
Medium
80,000
30,000
-20,000
Large
100,000
30,000
-40,000
Very Large
300,000
25,000
-160,000
For example, if Susan constructs a small station and the market is good, she will realize a profit of $50,000.
(a) What is the maximax decision?
(b) What is the maximin decision?
(c) What is the equally likely decision?
(d) What is the criterion of realism decision using an? value of 0.8?
2. Kenneth Brown is the principle owner of Brown Oil, and has to choose which new piece of equipment to purchase. His alternatives are shown in the following table:
Equipment
Good Market $
Poor Market $
Sub100
300,000
-200,000
OilerJ
250,000
-100,000
Texan
75,000
-18,000
For example, if Ken purchases a Sub100 and the market is good, he will realize a profit of $300,000.
(a) Ken believes that the chances of a good market are 70%, while the chances for a poor market are 30%. Find the EMV for each piece of equipment and determine the optimal decision.
(b) Calculate the expected value with perfect information (EVwPI). Given that answer, what is the most Ken should be willing to pay for a perfect forecast of the market?
3. Kenneth from the previous problem has decided that he should base his decision on utility rather than number of dollars. Kenneth is risk averse, and has the utility curve shown here:
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