# Homework 2 - Douglas Silber 3-16 Kenneth Brown is the...

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Douglas Silber 3-16 Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by a factor of over 100. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are shown in the following table: Equipment Favorable Market \$ Unfavorable Market \$ Sub 100 300,000 -200,000 Oiler J 250,000 -100,000 Texan 75,000 -18,000 For example, if Ken purchases a Sub 100 and if there is a favorable market, he will realize a profit of \$300,000. On the other hand, if the market is unfavorable, Ken will suffer a loss of \$200,000. But Ken has always been a very optimistic decision maker. (a) What type of decision is Ken facing? Ken is facing decision making under uncertainty, there are several possible outcomes for each alternative, and the decision maker does not know the probabilities of the various outcomes. (b) What decision criterion should he use? Due to the fact that Ken has always been a very optimistic decision maker, he should use the Maximax criterion to find the alternative that maximizes the maximum payoff or consequence for every alternative. (c) What alternative is best? For Ken, being optimistic and using Maximax, the Sub 100 alternative is best. Douglas Silber

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3-42 In the past few years, the traffic problems in Lynn McKell’s hometown have gotten worse. Now, Broad Street is congested about half the time. The normal travel time to work for Lynn is only 15 minutes when Broad Street is used and there is no congestion. With congestion, however, it takes Lynn 40
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## This note was uploaded on 06/21/2011 for the course ACCOUNTING 0116001 taught by Professor Bloom during the Spring '07 term at Santa Fe College.

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Homework 2 - Douglas Silber 3-16 Kenneth Brown is the...

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