Question

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).  

Answer 1

EV Sub 100- 0.7x300000 - 0.3x200000 = 150000

EV Oiler J- 0.7x250000 – 0.3x100000 = 145000

EV Texan- 0.7x75000 – 0.3x18000 = 47100

Ans (1)- As Bob is pessimistic in the approach he will consider the product with minimum loss. Hence he will choose the alternative with largest payoff keeping in mind that loss will occur. So he will select Texan.

Ans (2) – EV of Sub 100 is 150000

Ans(3)- EV of Oiler J is 145000

Ans (4)- Ken is very optimistic in approach so he will consider favourable situation will occur and will select the alternative with the highest value which is SUB 100