Solution, decision Ken facing is decision under uncertainty

Q. 3.17: Solution

The type of decision Ken facing is decision under uncertainty

The decision criterion that he should use is the Maximax

The best alternative is that he should choose Sub100, since it has the best possible outcome

Q. 3.19: (Use Excel)The decision model that should be used is Ken Brown should actually use the Maximize Expected Monetary Value (EMV) model.

The optimal decision is being the probabilities in the favorable market are seventy percent and thirty percent in unfavorable markets trust the optimal decision would be sub 100 reason being the EMV is (300,00*.70+(-200,000*.30)=150,000. As opposed to 145,000 and 47,100.



Solving for value x:0.70x – 200,000(0.30) = 145,0000.70x – 60,000 = 145,0000.70x = 205,000205,000 / 0.70 = 292,857, Answer: $292,857 (or $7,143 lower)

Q. 3.24: Solution

Opportunity loss table


Large facility 550,000 110,000 -310,000 -310,000

Medium-sized facility 300,000 129,000 -100,000 -100,000

Small facility 200,000 100,000 -32,000 -32000

No facility 0 0 0 0

The best option using the opportunity loss table would, therefore, be to invest in a small facility, as it would lead to the least amount of loss in the worst case scenario.

b) Similarly if using the minimax regret rule, in an attempt to remain risk neutral, the investor is likely to chose the scenario that results in the least amount of loss, with a small facility meeting such a criteria. The best choice under this rule would therefore, be to invest in a small facility, especially if one assumes that maximum regret is likely to occur for all the available options.

Q. 3.26: Solution

cost 45 revenue 95     produced cost produced cost produced cost produced cost

    6 270 7 315 8 360 9 405

demand   profit expected profit profit expected profit profit expected profit profit expected profit

6 0.1 300 30 255 25.5 210 21 165 16.5

7 0.3 300 90 350 105 305 91.5 260 78

8 0.5 300 150 350 175 400 200 355 177.5

9 0.1 300 30 350 35 400 40 450 45

total     300   340.5   352.5   317

I believe that through production of 8 cases of cheese will definitely provide the maximum total expected profit that is ($352.50)

Q. 3.36 Solution-762000944880Do not conduct study

Do not conduct study

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Small shop

1143000716280Large shop

Large shop

13716001325880No shop

No shop





25908001706880Small shop

Small shop

30480002316480Large shop

Large shop

31242002697480No shop

No shop

26670003688080Small shop

Small shop

30480004602480No shop

No shop



2969260297815Large shop

00Large shop

Q. 3.47: Solution

If John maximizes his expected utility his decision is likely to be geared towards investing in a small plant before carrying out a survey, as the probability of better returns are higher than if he chose not to carry out a survey but invested in a large plant. As such, should Thompson choose to maximize on his utility, and take greater chances, despite the odds being less sure if compared with a scenario in which a survey has been carried out. The biggest motivating factor would be the likely higher return.

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