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Grand Canyon ECN601 Module 2 problems




Question;3-17;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;FAVORABLE UNFAVORABLE;MARKET MARKET;EQUIPMENT ($) ($);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?;(b) What decision criterion should he use?;(c) What alternative is best?;Problem 3-19;The Lubricant is an expensive oil newsletter to which many oil;giants subscribe, including Ken Brown (see Problem 3-17 for details). In the;last issue, the letter described how the demand for oil products would be;extremely high. Apparently, the American consumer will continue to use oil;products even if the price of these products doubles. Indeed, one of the;articles in the Lubricant states that the chances of a favorable market for oil;products was 70%, while the chance of an unfavorable market was only 30%. Ken;would like to use these probabilities in determining the best decision.;a.) What decision model should be used?;b.) What is the optimal decision?;c.) Ken believes that the $300,000 figure for the;Sub 100 with a favorable market is too high. How much lower would this figure;have to be for Ken to change his decision made in part (b)?;EQUIPMENT FAVORITE MARKET UNFAVORABLE MARKET;Sub 100 300,000 -200,000;Oiler J 250,000 -100,000;Texan 75,000 -18,000;Problem 3-22;Allen Young has always been proud of his personal investment;strategies and has done very well over the past several years. He invests;primarily in the stock market. Over the past several months, however, Allen has;become very concerned about the stock market as a good investment. In some;cases it would have been better for Allen to have his money in a bank than in;the market. During the next year, Allen must decide whether to invest $10,000;in the stock market or in a certificate of deposit (CD) at an interest rate of;9%. If the market is good, Allen believes that he could get a 14% return on his;money. With a fair market, he expects to get an 8% return. If the market is;bad, he will most likely get no return at all-in other words, the return would;be 0%. Allen estimates that the probability of a good market is 0.4, the;probability of a fair market is 0.4, and the probability of a bad market is;0.2, and he wishes to maximize his long-run average return.;(a) Develop a decision table for this problem.;(b) What is the best decision?


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