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AB103 – Statistical and Quantitative Methods
Solutions - Tutorial 4
Chapters 6 Anderson, Sweeney, Williams, and Martin (ASWM)
6.4 (page 326)
a. The decision is to choose the best lease option; there are three alternatives. The chance
event is the number of miles Amy will drive per year. There are three possible outcomes.
b. The payoff table for Amy's problem is shown below. To illustrate how the payoffs
were computed, we show how to compute the total cost of the Forno Saab lease assuming
Amy drives 15,000 miles per year.
Total Cost = (Total Monthly Charges) + (Total Additional Mileage Cost)
= 36($299) + $0.15(45,000 - 36,000)
= $10,764 + $1350
= $12,114
c.
Optimistic Approach: Forno Saab ($10,764)
Conservative Approach: Hopkins Automotive ($11,700)
Opportunity Loss or Regret Table

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d. EV (Forno Saab) = 0.5($10,764) + 0.4($12,114) + 0.1($13,464) = $11,574
EV (Midtown Motors) = 0.5($11,160) + 0.4($11,160) + 0.1($12,960) = $11,340
EV (Hopkins Automotive) = 0.5($11,700) + 0.4($11,700) + 0.1($11,700) = $11,700
Best Decision: Midtown Motors
e.
f.
EV (Forno Saab) = 0.3($10,764) + 0.4($12,114) + 0.3($13,464) = $12,114
EV (Midtown Motors) = 0.3($11,160) + 0.4($11,160) + 0.3($12,960) = $11,700
EV (Hopkins Automotive) = 0.3($11,700) + 0.4($11,700) + 0.3($11,700) = $11,700
Best Decision: Midtown Motors or Hopkins Automotive
With these probabilities, Amy would be indifferent between the Midtown Motors and
Hopkins Automotive leases. However, if the probability of driving 18,000 miles per year
goes up any further, the Hopkins Automotive lease will be the best.

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6.9 (page 328)

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