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Return to Applied Problem 1 and suppose the managers of

Return to Applied Problem 1 and suppose the managers of the firm decide on the following subjective probabilities of congressional action on OINC:

Probability

OINC passes ........ 40%

OINC fails ........ 10

OINC stalls ......... 50

a. Compute the expected profits for all three decisions.

b. Using the expected value rule, which option should the managers choose?

c. Compute the standard deviations for all three decisions. Using the mean–variance rule, does any one of the decisions dominate? If so, which one?

d. What decision would the firm make using the coefficient of variation rule?

Probability

OINC passes ........ 40%

OINC fails ........ 10

OINC stalls ......... 50

a. Compute the expected profits for all three decisions.

b. Using the expected value rule, which option should the managers choose?

c. Compute the standard deviations for all three decisions. Using the mean–variance rule, does any one of the decisions dominate? If so, which one?

d. What decision would the firm make using the coefficient of variation rule?

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