Problem 1:
The lubricant is an expensive oil expensive oil newsletter to which many oils gaints subscribe, including Ken Brown (see problem 3-17 details). In the last issuse, the letter described how the demand for oil products would be extremely high. Apparently , the American consumer will contiue to use oil products even if the price of these products doubles. Indded, one of the articles in the Lubricant states that the chances of a favorable maketfor oil product was 70%, while the chance of an unfavorable market was only 30%. Ken would like to use probabilities in determining the best decision.
(a) What decision model should be used?
(b) What is the optimal decisison?
(c) Ken believes that the $300,000 figure for the Sub 100 with a favorable market is too high. How much lower would this figure have to be
for Ken to change his decision made in part b?
Problem 2:
Kenneth Brown is the prncipal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by a factor of over 100. At the present time, Ken is forced to consider purchasing some more quipment for to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are shown in the following table:
| EQUIPMENT |
Favorable Market($) |
Unfavorable Market($) |
|
|
|
|
| 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 orther hand, if the market is unfavorable, Ken will suffer a loss of $200,000. But Ken has always been a very optimistic decesion maker.
(a) What type of decesion is Ken facing?
(B) What decision criterion should he use?
(c) What alternative is best?
Problem 3:
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 concerend about the stock market as a good investement. In some cases, it would have been better for Allen to have his money in the bank than in the market.
During the next year, Allen must decide whetehr to invest $10,000 in the stock market or in a certificate of deposit(CD) at an intrest 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 returns 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?
Render, B., Stair JR, R., Hanna, M., & Hale, T. (2015). Quantitative Analysis for Management. (12th Ed) Pearson Education. ISBN: 1-269-73132-7.