Question 2: Problem solving (11 Marks) Kenneth Brown is the principal owner of Brown Oil, Inc. At the present time, Kenneth is forced to consider purchasing some more equipment for Brown Oil to increase the quality and productivity and to face the increasing competition. He can choose to purchase from five types of new machines. His alternatives are shown in the following decision table: 0,: Favorable Market 0,: Unfavorable Market Alternative Decisions (Machine type) Sub 100 Sub 200 Oil J Texan Texan 100 Probabilities $ 300000 $ 350000 $ 250000 $ 75000 S 72000 0.2 Outcomes 0,: Moderate Market $ 150000 $ 200000 $ 100000 S 50000 $ 70000 0.5 $-200000 $ 200000 $-100000 $0 $ 5000 0.3 For example, if Kenneth 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, Kenneth will suffer a loss of $200,000. Kenneth has always been a very pessimistic decision maker. In case Kenneth has no information of the market condition probabilities. Questions: 1. What type of decision environment is Kenneth facing? (1 Mark) 2. What decision criterion should he use? (1 Mark) 3. What alternative is best? (2 Mark) If information about the probability of each outcome becomes available to Kenneth then: Questions: 4. Find the best decision using the adequate technique. (3 Marks) 5. How much Kenneth should pay to know the perfect information about the market condition? (3 Marks) 6. Is it reasonable for Kenneth to purchase the perfect information about the market outcomes for $20,000? Explain why. (1 Mark)