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157hmk01

# 157hmk01 - ARE 157 M.Whitney Winter 2011 ANALYSIS FOR...

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ARE 157 Winter 2011 M.Whitney ANALYSIS FOR PRODUCTION MANAGEMENT Homework 1, due Monday, January 24th, at start of class 1. (13) Martin is in college, and is trying to decide what career path to pursue. His possible choices, and their anticipated annual payoffs, are shown below: (i) Accounting. \$60,000 if the economy is strong, and \$40,000 if the economy is weak (as he might have to take a related job such as bookkeeper in the latter case) (ii) Banking: \$50,000 if the economy is strong, and \$44,000 if weak. (iii) Real estate: \$95,000 if strong, \$15,000 if weak. (a) (5) Develop a decision matrix that shows the actual dollar outcomes that occur for each of the three strategy options above, and calculate the expected value and standard deviation for each option. Assume the chance of a strong economy is 40%. If Martin is risk-neutral, which option should he choose? (b) (3) Now, suppose he is risk-averse. Based on mean and standard deviation, are there any choices he can eliminate as "dominated", or should he give consideration to all three? Which one would be the best choice, if he uses coefficient of variation as his criterion? What choice would he make, if he chooses the career that has the highest expected value, subject to the rule that none of the actual outcomes fall below his minimum required income of \$30,000, which he must earn in order not to default on any of his rent and auto loan payments? (c)

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157hmk01 - ARE 157 M.Whitney Winter 2011 ANALYSIS FOR...

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