#17 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?
#17
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 $200,000. But
Ken has always been a very optimistic decision
maker.
(a) What type of decision is Ken facing?
(b) What decision criterion should he use?
(c) What alternative is best?
#18
Although Ken Brown (discussed in Problem 3-17) is the principal owner of Brown Oil, his brother Bob is
credited with making the company a financial success. Bob is vice president of finance. Bob attributes
his success to his pessimistic attitude about business and the oil industry. Given the information from
Problem 3-17, it is likely that Bob will arrive at a different decision. What decision criterion should Bob
use, and what alternative will he select?
#24
Today’s Electronics specializes in manufacturing modern electronic components. It also builds the
equipment that produces the components. Phyllis Weinberger, who is responsible for advising the
president of Today’s Electronics on electronic manufacturing equipment, has developed the following
table concerning a proposed facility:
PROFIT ($)
STRONG FAIR POOR
MARKET MARKET MARKET
Large facility 550,000 110,000 –310,000
Medium-sized facility 300,000 129,000 –100,000
Small facility 200,000 100,000 –32,000
No facility 0 0 0
(a) Develop an opportunity loss table.
(b) What is the minimax regret decision?
#25
Brilliant Color is a small supplier of chemicals and equipment that are used by some photographic stores
to process 35mm film. One product that Brilliant Color supplies is BC-6. John Kubick, president of
Brilliant Color, normally stocks 11, 12, or 13 cases of BC-6 each week. For each case that John sells, he
receives a profit of $35. Like many photographic chemicals, BC-6 has a very short shelf life, so if a case is
not sold by the end of the week, John must discard it. Since each case costs John $56, he loses $56 for
every case that is not sold by the end of the week. There is a probability of 0.45 of selling 11 cases, a
probability of 0.35 of selling 12 cases, and a probability of 0.2 of selling 13 cases.
(a) Construct a decision table for this problem. Include all conditional values and probabilities in the
table.
(b) What is your recommended course of action?
(c) If John is able to develop BC-6 with an ingredient that stabilizes it so that it no longer has to be
discarded, how would this change your recommended course of action?
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