Question

Question #1 - Ken Brown is the principal owner of 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 ($)	UNFAVORABLE MARKET ($)
Sub 100	325,000	−250,000
Oiler J	225,000	−100,000
Texan	70,000	−18,000

For example, if Ken purchases a Sub 100 and if there is a favorable market, he will realize a profit of $350,000. On the other hand, if the market is unfavorable, Ken will suffer a loss of $250,000. But Ken has always been a very optimistic decision maker.

a. What type of decision is Ken facing?

b. What decision criterion should he used?

c. What alternative is best?

d. Although Ken Brown is the principal owner of Oil Inc, 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. Given the information, it is likely that Bob will arrive at a different decision. What decision criterion should Bob use, and what alternative will he select?

Answer 1

a.

The type of decision Ken facing is to which of the equipment - Sub 100, Oiler J or Texan to purchase to maximize the profit.

b.

Since Ken is a optimistic decision maker, he use Maximax decision criterion.

c.

The maximum profit for Sub 100 decision is 325,000

The maximum profit for Oiler J decision is 225,000

The maximum profit for Texan decision is 70,000

The maximum of maximum profit for all decisions is 325,000 for Sub 100 decision.

This, Sub 100 decision alternative is best.

d.

Since Bob is a pessimistic decision maker, he use Maximin decision criterion.

The minimum profit for Sub 100 decision is -250,000

The minimum profit for Oiler J decision is -100,000

The minimum profit for Texan decision is -18,000

The maximum of minimum profit for all decisions is -18,000 for Texan decision.

Texan decision alternative is best using Maximin approach and will be selected by Bob.