# Chap 3 - 316,318,320,322,324,326,328,332,3 44 3-16 a...

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3-16, 3-18, 3-20, 3-22, 3-24, 3-26, 3-28, 3-32, 3- 44 3-16 . a. Decision making under uncertainty. b. Maximax criterion. c. Sub 100 because the maximum payoff for this is \$300,000.\ Equipment Favorable Unfavorabl e Row Maximum Row Minimum Sub 100 300000 200000 300000 200000 Oiler J 250000 100000 250000 100000 Texan 75000 18000 75000 18000 3-18 . a. Decision making under risk—maximize expected monetary value. b. 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. 3-20. The opportunity loss table is Alternative Good Economy Poor Economy Stock Market 0 43000 Bonds 50000 3000 CDs 57000 0 EOL(Stock Market) = 0.5(0) + 0.5(43,000) = 21,500 This minimizes EOL. EOL(Bonds) = 0.5(50,000) + 0.5(3,000) = 26,500 EOL(CDs) = 0.5(57,000) + 0.5(0) = 28,500 3-22 a. Expected value with perfect information is 1,400(0.4) + 900(0.4) + 900(0.2) = 1,100; the maximum EMV without the information is 900. Therefore, Allen should pay at most EVPI = 1,100 – 900 = \$200.
b. Yes, Allen should pay [1,100(0.4) + 900(0.4) + 900(0.2)] - 900 = \$80.
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