Kenneth Brown is the principal owner of Brown Oil

Part 1 of 3 – Part 1

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:

Equipment	Favorable Market ($) with probability 70%	Unfavorable Market ($) with probability 30%
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.

Although Ken Brown 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.

Question 1 of 9 If Bob would want to base his decision on the Maximin criterion, then which equipment would he choose? A. Sub 100 B. Oiler J C. Texan D. The same as his brother Ken’s choice

Question 2 of 9 Based on the above information, the Expected Monetary Value (EMV) of Sub 100 is . (Please round to a whole dollar.)

Question 3 of 9 Based on the above information, the Expected Monetary Value (EMV) of Oiler J is . (Please round to a whole dollar.)

Question 4 of 9 If Ken would want to maximize the Expected Monetary Value (EMV), then he should choose __________. A. Sub 100 B. Oiler J C. Texan

Question 5 of 9 If Ken believes that Sub 100 cannot get $300,000 even in a favorable market, then this figure needs to be at least less for Ken to change his decision. (Please round to a whole dollar.) Hint: You may want to use the What-If-Analysis Goal Seek Tool in Excel as described in Week 1 PPP Slides (1-30).

Part 2 of 3 – Part 2

Megley Cheese Company is a small manufacturer of several
different cheese products. One of the products is a cheese spread that is sold
to retail outlets. Jason Megley must decide how many cases of cheese spread to
manufacture each month. The probability that the demand will be six cases is
0.1, for 7 cases is 0.3, for 8 cases is 0.5, and for 9 cases is 0.1. The cost
of every case is $45, and the price that Jason gets for each case is $95.
Unfortunately, any cases not sold by the end of the month are of no value, due
to spoilage.

Hint: You need to fill in the following table and be careful with the waste
whenever production exceeds consumption or the forgone revenue if
supply/production falls short of demand.

Profit Demand is 6 Demand is 7 Demand is 8 Demand is 9 Probability Production is 6 Production is 7 Production is 8 Production is 9

Question 6 of 9 10.0 Points The Expected Monetary Value (EMV) of producing 6 cases of cheese spread is . (Please round to a whole dollar.)

Question 7 of 9 The Expected Monetary Value (EMV) of producing 9 cases of cheese spread is . (Please round to a whole dollar.)

Question 8 of 9 John should manufacture _________ cases of cheese spread. A. 6 B. 7 C. 8 D. 9

Part 3 of 3 – Part 3

A group of medical professionals is
considering the construction of a private clinic. If the medical demand is high
(i.e., there is a favorable market for the clinic), the physicians could
realize a net profit of $100,000. If the market is not favorable, they could
lose $40,000. Of course, they don’t have to proceed at all, in which case there
is no cost. In the absence of any market data, the best the physicians can
guess is that there is a 50–50 chance the clinic will be successful.

Question 9 of 9 Construct a decision tree by fill-in the blanks below in reference to the following chart. The decision choice at Decision 1 is and that at Decision 2 is Event 1 is and Event 2 is . The probability for Prob1 is and that for Prob2 is . Payoff 1 is and Payoff 2 is . EMV 1 is and EMV 2 is .