BUSN 603 BUSN603 Problem Set 3 Answer (APUS) (APUS)

BUSN 603 BUSN603 Problem Set 3 Answer (APUS) (APUS)

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BUSN 603 Quantitative Analysis Problem Set 3 Answer (APUS)

Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by a factor of over 100. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are shown in the following table:

Equipment

Favorable Market ($)

with probability 70%

Unfavorable Market ($)

with probability 30%

Sub 100

300,000

–200,000

Oiler J

250,000

–100,000

Texan

75,000

–18,000

For example, if Ken purchases a Sub 100 and if there is a favorable market, he will realize a profit of $300,000. On the other hand, if the market is unfavorable, Ken will suffer a loss of $200,000. But Ken has always been a very optimistic decision maker.

Although Ken Brown is the principal owner of Brown Oil, his brother Bob is credited with making the company a financial success. Bob is vice president of finance. Bob attributes his success to his pessimistic attitude about business and the oil industry.

  1. If Bob would want to base his decision on the Maximin criterion, then which equipment would he choose?
  2. Based on the above information, the Expected Monetary Value (EMV) of Sub 100 is  150000 . (Please round to a whole dollar.)

  3. Based on the above information, the Expected Monetary Value (EMV) of Oiler J is  145000 . (Please round to a whole dollar.)

  4. If Ken would want to maximize the Expected Monetary Value (EMV), then he should choose __________.

  5. If Ken believes that Sub 100 cannot get $300,000 even in a favorable market, then this figure needs to be at least  7143less for Ken to change his decision. (Please round to a whole dollar.) 

  6. The Expected Monetary Value (EMV) of producing 6 cases of cheese spread is  300 . (Please round to a whole dollar.) 

  7. The Expected Monetary Value (EMV) of producing 9 cases of cheese spread is  317 . (Please round to a whole dollar.) 

  8. John should manufacture _________ cases of cheese spread

  9. Construct a decision tree by fill-in the blanks below in reference to the following chart.

    The decision choice at Decision 1 is  
    Construct Clinic and that at Decision 2 is  Do Not ConstructEvent 1 is  Favorable and Event 2 is  Unfavorable .

    The probability for Prob1 is  
    .5 and that for Prob2 is  .5 .

    Payoff 1 is  
    100000 and Payoff 2 is  -40000 .

    EMV 1 is  
    30000 and EMV 2 is  0 .


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