# solution. ch3 homework problems - 3-17 Using the maximin...

• Notes
• 2

This preview shows page 1 - 2 out of 2 pages.

3-17. Using the maximin criterion, the best alternative is the Texan (see table above) because the worst payoff for this (\$_18,000) is better than the worst payoffs for the other decisions. 3-18. a. Decision making under risk—maximize expected monetary value EMV (Sub 100) = 0.7(300,000) + 0.3(–200,000) = 150,000 EMV (Oiler J) = 0.7(250,000) + 0.3(–100,000) = 145,000 EMV (Texan) = 0.7(75,000) + 0.3(–18,000) = 47,100 Optimal decision: Sub 100. c. Ken would change decision if EMV (Sub 100) is less than the next best EMV, which is \$145,000. Let X = payoff for Sub 100 in favorable market. (0.7)(X) + (0.3)(_200,000) < 145,000 0.7X < 145,000 + 60,000 = 205,000 X < (205,000)/0.7 = 292,857.14 The decision would change if this payoff were less than 292,857.14, so it would have to decrease by about \$7,143. 3-19. a. The expected value (EV) is computed for each. alternative. EV(stock market) = 0.5(80,000) + 0.5(_20,000) = 30,000 EV(Bonds) = 0.5(30,000) + 0.5(20,000) = 25,000 EV(CDs) = 0.5(23,000) + 0.5(23,000) = 23,000 Therefore, he should invest in the stock market. b. EVPI = EV(with perfect information) _ (Maximum EV without P, I) = [0.5(80,000) + 0.5(23,000)] _ 30,000 =51,500 _ 30,000 _ 21,500 Thus, the most that should be paid is \$21,500. 3-20. The opportunity loss table is Alternative Good Economy Poor Economy Stock Market 0 43,000 Bonds 50,000 3,000 CDs 57,000 0 EOL(Stock Market)= 0.5(0) + 0.5(43,000) = 21,500*