# Problem 1 – Worth 2 pts Jerry is considering buying a new...

• 2
• 83% (6) 5 out of 6 people found this document helpful

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

Problem 1 – (Worth 2 pts) Jerry is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Jerry has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices. States of Nature Alternatives Lower gas prices Gas prices unchanged Higher gas prices Probability .3 .5 .2 Subcompact \$16,000 \$21,000 \$23,000 Compact \$15,000 \$20,000 \$22,000 Full size \$18,000 \$19,000 \$6,000 Calculate the expected monetary value for each decision alternative. Which decision yields the highest EMV?