You are considering three investment alternatives for some spare cash: Old Reliable Corporation stock (As), Fly-By-Nite...

 

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You are considering three investment alternatives for some spare cash: Old Reliable Corporation stock (As), Fly-By-Nite Cargo Company stock (A), and a federally insured savings certificate (As). You expect the economy will either "boom" (N₁) or "bust" (N), and you expect that a boom is more likely (p:=0.6) than a bust (p = 0.4). Outcomes for the three alternatives are expected to be: (1) $2000 in boom and $500 in bust for ORC; (2) $6000 in boom but $-5000 (loss) in bust for FBN; and (3) $1200 for the certificate in either case. The payoff table is shown as below. (15) Alternatives N1: boom A (ORC) A (FBN) As (Cert) P₁ = 0.6 $+2000 $+6000 $+1200 N2: bust P: -0.4 $+500 $-5000 $+1200 1) Calculate the expected values for the three investment alternatives and find out which alternative maximizes expected value. 2) If you have no idea of the economy probabilities p; and p, what would be your decision based on uncertainty using (a) maximax, (b) maximin, (c) equally likely? 3. The first two units of a product cost a total of $17,000 to produce. If you believe an 70% learning curve applies, (10) 1) how much does the first product cost? 2) how much would you expect the fourth unit to cost? 3) (Optional bonus question 5') how much would you expect the 69th unit to cost? You are considering three investment alternatives for some spare cash: Old Reliable Corporation stock (As), Fly-By-Nite Cargo Company stock (A), and a federally insured savings certificate (As). You expect the economy will either "boom" (N₁) or "bust" (N), and you expect that a boom is more likely (p:=0.6) than a bust (p = 0.4). Outcomes for the three alternatives are expected to be: (1) $2000 in boom and $500 in bust for ORC; (2) $6000 in boom but $-5000 (loss) in bust for FBN; and (3) $1200 for the certificate in either case. The payoff table is shown as below. (15) Alternatives N1: boom A (ORC) A (FBN) As (Cert) P₁ = 0.6 $+2000 $+6000 $+1200 N2: bust P: -0.4 $+500 $-5000 $+1200 1) Calculate the expected values for the three investment alternatives and find out which alternative maximizes expected value. 2) If you have no idea of the economy probabilities p; and p, what would be your decision based on uncertainty using (a) maximax, (b) maximin, (c) equally likely? 3. The first two units of a product cost a total of $17,000 to produce. If you believe an 70% learning curve applies, (10) 1) how much does the first product cost? 2) how much would you expect the fourth unit to cost? 3) (Optional bonus question 5') how much would you expect the 69th unit to cost?

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