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6_Tutorial_Exercises_Solution

# 6_Tutorial_Exercises_Solution - MS3401(Summer Term Chapter...

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MS3401 (Summer Term) Chapter 12: Decision Analysis Q18 Solution a) EV (widget) = 120,000 (0.2) + 70,000 (0.7) – 30,000 (0.1) = \$70,000 EV (hummer) = 60,000 (0.2) + 40,000 (0.7) + 20,000 (0.1) = \$42,000 EV (nimnot) = 35,000 (0.2) + 30,000 (0.7) + 30,000 (0.1) = \$31,000 Introduce widget, with highest EV c) Expected value given perfect information = 120,000 (0.2) + 70,000 (0.7) + 30,000 (0.1) = 76,000 EVPI = 76,000 – EV (widget) = 76,000 – 70,000 = \$6,000 The company would consider this a maximum, and since perfect information is rare, it would pay at most \$6,000 probably. Q20 Solution To be indifferent, the expected value for the investments would equal each other: EV (stocks) = EV (bonds). Next, let the probability of good economic conditions equal p and the probability of bad conditions equal 1– p: EV (stocks) = 10,000 (p) + (– 4000) (1 - p) EV (bonds) = 7000 (p) + 2000 (1 - p) EV (stocks) = EV (bonds) 10,000 (p) + (– 4000) (1 - p) = 7000 (p) + 2000 (1 - p) 10000p – 4000 + 4000p = 7000p + 2000 - 2000p 9000p = 6000 p = 0.667 Therefore, probability of good conditions = p = 0.667, and probability of bad conditions = 1 – p = 0.333 Q25 Solution Using expected value; EV (compacts) = 300,000 (0.6) + 150,000 (0.4) = \$240,000 EV (full-sized) = -100,000 (0.6) + 600,000 (0.4) = \$180,000 EV (trucks) = 120,000 (0.6) + 170,000 (0.4) = \$ 140,000 Select the compact car dealership, with highest EV.

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