Decision Analysis - QUANTITATIVE ANALYSIS ASSIGNMENT 2...

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QUANTITATIVE ANALYSISASSIGNMENT 2: DECISION MAKING3.16a. This is the decision making under uncertainty because we do not know exactly the probability of the outcomesb. Maximax criterion because Ken has always been a very optimistic decision maker.c.EquipmentFavorableUnfavorableRow MaximumRow minimumSub 100300000-200000300000-200000Oiler J250000-100000250000-100000Texan75000-1800075000-18000The alternative for the decision of Ken is 3000003.18a. This is the decision making under risk – Maximize expected monetary valueb. Optimal decision:EMV (Sub 100) = 07(300,000)+0.3(-200,000) = 150,000EMV (Oiler J) = 0.7(250,000)+0.3(-100,000) = 145,000EMV (Texan) = 0.7(75,000)+0.3(-18,000) = 47,000Optimal decision is Sub 100c. 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) < 145,0000.7X < 145,000 + 60,000 = 205,000X < (205,000)/0.7 = 292,857.14The decision would change if this payoff were less than 292,857.14, so it would have to decrease by about \$7,1433.20AlternativeGood EconomyP=0.5, Best = 80,000Poor Economyq=0.5, best = 23,000 Stock market043,000Bonds50,0003,000CDS57,0000EOL (stock market) = 0.5x0 + 0,5x43,000 = 21,500 => the best optimum EOLEOL (Bonds) = 0,5x50,000 + 0,5x3,000 = 26,500EOL (CDs) = 0,5x57,000 + 0,5x0 = 28,500
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