Chapter 3: Problems 3-17, 3-19, 3-22, 3-23, 3-28, 3-29, 3-32, 3-40, 3-41, and 3-42
3.17 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. Given the information from problem 3-16, it is likely that Bob will arrive at a different decision. What decision criterion should Bob use, and what alternative will he select?
3.19 Mickey Lawson is considering investing some money that he inherited. The following payoff table gives the profits that would be realized during the next year for each of the three investment alternatives Mickey is considering
3.22 In Problem 3.21, you helped Allen Young determine the best investment strategy. Now, Young is thinking about paying for a stock market newsletter. A friend of Young said that these types of letters could predict very accurately whether the market would be good, fair, or poor. Then, based on these predictions, Allen could make better investment decisions.
3.23 Today’s Electronics specializes in manufacturing modern electronic components. It also builds the equipment that produces the components. Phyllis Weinberger, who is responsible for advertising the president of Today’s Electronics on electronic manufacturing equipment, has developed the following table concerning a proposed facility
3.28 A group of medical professionals is considering the construction of a private clinic. If the medical demand is high (i.e., there is a favorable market for the clinic), the physicians could realize a net profit of $100,000. If the market is not favorable, they could lose $40,000. Of course, they don’t have to proceed at all, in which case there is no cost. In the absence of any market data, the best the physicians can guess is that there is a 50 – 50 chance the clinic will be successful. Construct a decision tree to help analyze this problem. What should the medical professionals do?
3.29 The physicians in Problem 3.28 have been approached by a market research firm that offers to perform a study of the market at a fee of $5,000. The market researchers claim their experiences enable them to use Bayes’ theorem to make the following statements of probability
3.32 Bill Holliday is not sure what he should do. He can either build a quadplex (i.e., a building with four apartments), build a duplex, gather information, or simply do nothing. If he gathers additional information, the results could be either favorable or unfavorable, but it would cost him $3,000 to gather the information. Bill believes that there is a 50-50 chance that the information will be favorable. If the rental market is favorable, Bill will earn $15,000 with the quadplex or $5,000 with the duplex. Bill doesn’t have the financial resources to do both. With an unfavorable rental market, however, Bill could lose $20,000 with the quadplex or $10,000 with the duplex. Without gathering additional information, Bill estimates that the probability of a favorable rental market is 0.7. A favorable report from the study would increase the probability of a favorable rental market to 0.9. Furthermore, an unfavorable report from the additional information would decrease the probability of a favorable rental market to 0.4. Of course, Bill would forget all of these numbers and do nothing. What is your advice to Bill?
3.40 In Problem 3-28, you helped the medical professionals analyze their decision using expected monetary value as the decision criterion. This group has also assessed their utility for money: U( - $45,000) = 0, U( -$40,000) = 0.1, U( -$5,000) = 0.7, U($O) = 0.9, U($95,000) = 0.99, and U($100,000) = 1. Use expected utility as the decision criterion, and determine the best decision for the medical professionals. Are the medical professionals risk seekers or risk avoiders?
3.41 In this chapter a decision tree was developed for John Thompson. After completing the analysis, John was not completely sure that he is indifferent to risk. After going through a number of standard gambles, John was able to assess his utility for money. Here are some of the utility assessments: U( - $190,000) = 0, U( - $180,000) = 0.15, U(- $30,000) = 0.2, U($0) = 0.3, U($90,000) = 0.5, U($100,000) = 0.6, U($190,000) = 0.95, and U($200,000) = 1.0. If John maximizes his expected utility, does his decision change?
3.42 In the past few years, the traffic problems in Lynn McKell's hometown have gotten worse. Now, Broad Street is congested about half the time. The normal travel time to work for Lynn is only 15 minutes when Broad Street is used and there is no congestion. With congestion, however, it takes Lynn 40 minutes to get to work. If Lynn decides to take the expressway, it will take 30 minutes regardless of the traffic conditions. Lynn's utility for travel time is: U(15minutes) = 0.9, U(30 minutes) = 0.7, and U(40 minutes) = 0.2.
- This tutorial hasn't been purchased yet.
- Posted on Oct. 10, 2011 at 11:15:23AM
Week 3 module.docx (255K) (Preview)