HW3_Solns_Decision-2.pdf - UMASS LOWELL Manning School of...

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UMASS LOWELLPOMS.2010 Manning School of Business T. Sloan 1SOLUTIONS TO HW #3 Chapter 3 Problems 19, 34, 35, 36, and 37 (pp. 103110) 3-19. a. Decision making under riskmaximize 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. 3-34. EMV for node 1 = 0.5(100,000) + 0.5(40,000) = $30,000. Choose the highest EMV, therefore construct the clinic.
HW #3 solutions continued 23-35. a. b. EMV(node 2) = (0.82)($95,000) + (0.18)($45,000) = 77,900 8,100 = $69,800 EMV(node 3) = (0.11)($95,000) + (0.89)($45,000) = 10,450 $40,050 = $29,600 EMV(node 4) = $30,000 EMV(node 1) = (0.55)($69,800) + (0.45)($5,000) = 38,390 2,250 = $36,140 The EMV for using the survey = $36,140. EMV(no survey) = (0.5)($100,000) + (0.5)($40,000) = $30,000 The survey should be used. c. EVSI = ($36,140 + $5,000) $30,000 = $11,140. Thus, the physicians would pay up to $11,140 for the survey.

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