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##### BS350 week 3 assignment

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**Question**

Question;Chapter 3 Assignment;These problems are adapted from problems in the;textbook.;Each of the twelve lettered parts carries equal;weight.;**You must show;work and give an explanation for each answer.**;1. Susan;Solomon is thinking about starting her own independent gasoline station.;Susan?s problem is to decide how large her station should be. After a careful;analysis, Susan developed the following table;Size of;Station;Good Market $;Fair Market $;Poor Market $;Small;50,000;20,000;-10,000;Medium;80,000;30,000;-20,000;Large;100,000;30,000;-40,000;Very Large;300,000;25,000;-160,000;For example, if;Susan constructs a small station and the market is good, she will realize a;profit of $50,000.;(a) What is the maximax decision?;(b) What is the maximin decision?;(c) What is the equally likely decision?;(d) What is the criterion of realism decision using;an? value of 0.8?;2. Kenneth;Brown is the principle owner of Brown Oil, and has to choose which new piece of;equipment to purchase. His alternatives are shown in the following table;Equipment;Good Market $;Poor Market $;Sub100;300,000;-200,000;OilerJ;250,000;-100,000;Texan;75,000;-18,000;For example, if;Ken purchases a Sub100 and the market is good, he will realize a profit of;$300,000.;(a) Ken believes that the chances of a good market;are 70%, while the chances for a poor market are 30%. Find the EMV for each;piece of equipment and determine the optimal decision.;(b) Calculate the expected value with perfect;information (EVwPI). Given that answer, what is the most Ken should be willing;to pay for a perfect forecast of the market?;3. Kenneth from the previous;problem has decided that he should base his decision on utility rather than;number of dollars. Kenneth is risk averse, and has the utility curve shown;here;(a) Using;the utility curve above, replace the dollar figures in the table below with;utility values.;Equipment;Good Market $;Poor Market $;Sub100;300,000;-200,000;OilerJ;250,000;-100,000;Texan;75,000;-18,000;(b) Find the expected utility for each piece of;equipment and determine the optimal decision. If his decision has changed from;the previous problem, explain why.;4. Jerry Smith;is thinking about opening a bicycle shop in his hometown. He can open a small;shop, a large shop, or no shop at all. If the market is favorable, a large shop;will earn $60,000 while a small shop will earn $30,000. If the market is;unfavorable, a large shop will lose $40,000 while a small shop will lose;$10,000. Opening no shop earns $0. At the moment, his best guess is that there;is a 50% chance of a favorable market (and a 50% chance of an unfavorable;market).;Jerry has;the opportunity to have a market survey conducted for $5,000. It is estimated;that there is a 60% chance that the market survey will come back favorable.;With a favorable market survey result, there is a 90% chance that the market;will actually be favorable. If on the other hand the market survey comes back;unfavorable (40% chance), then there is only a 12% chance that the market will;actually be favorable.;A;decision tree for this scenario is below.;(a) Find the EMV at node 6, then find the EMV at;node 7, then determine the decision that should be made if Node D is reached.;(b) Find the EMV at node 4, then find the EMV at;node 5, then determine the decision that should be made if Node C is reached.;(Hints: Remember to include the cost of the market survey in the payoffs, and;remember that ?No Shop? is an option).;(c) Find the EMV at node 2, then find the EMV at;node 3, then determine the decision that should be made if Node B is reached.;(d) Find the EMV at node 1, then determine if the;market survey should be conducted. If the survey is conducted, determine what;he should do if the survey is favorable and what he should do if the survey is;unfavorable.

Paper#56699 | Written in 18-Jul-2015

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