QUESTION 1

Joe faces 3 choices after his graduation. He can go to a graduate school or set up his own business or assist his father in the family business. His payoff for each one of these options depends on whether the parliament adopts one of 3 legislations referred to as: legislation A, legislation B and legislation C which are mutually exclusive and collectively exhaustive events. Joe evaluates each option in terms of its payoff for the next 5 years. If legislation A is voted, he expects to earn Rs 3m if he sets up his own business and Rs 4m if he joins the family business. If legislation B is voted, he expects to earn Rs 2m if he sets up his own business and Rs 6m if he joins the family business. If legislation C is voted, he would earn Rs 5m if he sets up his own business and Rs 2m if he joins the family business. If he goes to a graduate school, he expects to earn Rs 3.5m irrespective of the legislation in place. There is 50% chance that legislation A is adopted and 20% that legislation B is adopted.

(a) Represent the information above in a decision table.

(b) What should Joe do under the minimax regret decision criterion?

(c) What should Joe do under the expected monetary value criterion?

(d) Justify whether you agree or disagree with the following quote "the minimax decision criterion is a conservative approach to evaluate decision options while the maximax decision criterion is an optimistic approach"

(e) Finally Joe opts to set up his own business. After five years of operation he must now decide whether or not to invest in an assistant. If he hires an assistant and the state of the economy improves he knows that his sales would be Rs 12m, Rs 5m if the state of the economy worsens and Rs 10m if it remains stable. Without an assistant, he would only be able to take sale orders of 7m if the economy is good, Rs 5m if the state of the economy worsens and Rs 6m if the economy remains stable. An assistant would cost him Rs 1m in salaries and benefits and there is a 30% chance that the economy improves and 40% chance that it worsens. Draw a decision tree to represent the choices faced by Joe, the expected return for each decision and the decision he should adopt.