A company is considering three different projects (A, B, C) in an attempt to diversify. The...
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A company is considering three different projects (A, B, C) in an attempt to diversify. The effectiveness of each project (in terms of revenue) are dependent upon the level of the economy. There five possible levels (1-5) based on economic projections. The assumed probability of each level occurring are listed below. Probability 0.2 Outcome 1 2 0.1 3 0.4 4 0.2 5 0.1 The expected payoffs in $100,000's for each alternative under each possible outcome is as follows. Outcome Project 1 2 3 4 5 A $98 $173 $198 $256 $297 B $127 $133 $143 $157 $221 C $57 $156 $187 $243 $371 a) Under a MaxiMin policy, which alternative is best? Explain your answer. b) Under a MiniMax Regret policy, which alternative is best? Explain your answer. c) What is the expected value of each alternative? d) Assume a source of information is available to help predict the level of the economy. What is the expected value of perfect information? e) Assume the probability of outcomes 1 and 2 are not certain. The owner believes that together they do account for 0.3 of the total probability. Determine how much the probabilities of outcomes 1 and 2 could change before Alternative B is better than Alternative A. f) Would a risk seeking decision maker be more likely to use a MaxiMax and MaxiMin decision criteria? Explain your answer. A company is considering three different projects (A, B, C) in an attempt to diversify. The effectiveness of each project (in terms of revenue) are dependent upon the level of the economy. There five possible levels (1-5) based on economic projections. The assumed probability of each level occurring are listed below. Probability 0.2 Outcome 1 2 0.1 3 0.4 4 0.2 5 0.1 The expected payoffs in $100,000's for each alternative under each possible outcome is as follows. Outcome Project 1 2 3 4 5 A $98 $173 $198 $256 $297 B $127 $133 $143 $157 $221 C $57 $156 $187 $243 $371 a) Under a MaxiMin policy, which alternative is best? Explain your answer. b) Under a MiniMax Regret policy, which alternative is best? Explain your answer. c) What is the expected value of each alternative? d) Assume a source of information is available to help predict the level of the economy. What is the expected value of perfect information? e) Assume the probability of outcomes 1 and 2 are not certain. The owner believes that together they do account for 0.3 of the total probability. Determine how much the probabilities of outcomes 1 and 2 could change before Alternative B is better than Alternative A. f) Would a risk seeking decision maker be more likely to use a MaxiMax and MaxiMin decision criteria? Explain your answer.
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Business Statistics For Contemporary Decision Making
ISBN: 978-1118749647
8th edition
Authors: Black Ken
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