Question One.The ABC Book Company has a choice of publishing one of two books on the subject of Greekmythology. It expects the sales period for each to be extremely short, and it estimates profitprobabilities as follows:Probability0.20.30.30.2Book AProfitClass Exercise$2,0002,3002,600: 2,900Probability0.10.40.40.1Book BProfit$1,5001,7001,9002,100Calculate the expected profit, standard deviation, and coefficient of variation for each of the twobooks. If you were asked which of the two to publish, what would be your advice?

The objective of the question is to calculate the expected profit, standard deviation, and…

Answered: Question One. The ABC Book Company has…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please no written by hand and no emage Suppose a company can select among two decisions (d1 and d2) and face three states of nature (s1, s2 and s3) with the following payoff table: Decision s1 s2 s3 d1 150 200 200 d2 50 200 500 The probabilities of s1, s2, and s3 are unknown. Using the optimistic approach, what is the optimal decision and what is the value of the payoff? Place the optimal decision in the first answer box and the maximum payoff used to arrive at this decision in the second.
If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he expects a crop of 50,000 bushels. The cost of pesticides is $30,000 and the other costs associated with planting and harvesting the crop total $450,000. The price of corn at harvest time will either be $9.00 with probability of 0.50 or it will be $11.00 with probability 0.50, so if the farmer decides to sell the crop at harvest, the expected price per bushel that he will receive is $10.00. If the farmer decides to sell the crop at harvest, then: a. He should not use pesticides because not using pesticides ensures greater expected profit. b. He should not use pesticides because not using pesticides ensures lower expected profit. c. He should use pesticides because using pesticides ensures greater expected profit. d. He should use pesticides because using pesticides ensures lower expected profit.
Your company must decide whether to introduce a new product. The sales of the product will be either at a high (success) or low (failure) level. The conditional value for this decision is as follows Decision High Low Introduce $4,000,000 -$2,000,000 Do Not Introduce 0 0 Probability 0.3 0.7 You have the option to conduct a market survey to sharpen you market demand estimate. The survey costs $200,000. The survey provides incomplete information about the sales, with three possible outcomes: (1) predicts high sales, (2) predicts low sales, or (3) inconclusive. Such surveys have in the past provided these results Result High Low Predicts High 0.4 0.1 Inconclusive 0.4 0.5 Predicts Low 0.2 0.4 a) Using expected monetary value, what is your decision? b) What is the expected value of perfect information before taking the survey? c) Draw the complete decision tree, including the survey option. d) What is the…
Mega Studios is thinking of producing a megafilm which could be a megahit or a megaflop. Profit is uncertain for two reasons: (1) the cost of producing the film may be low or high, and (2) the market reception for the film may be strong or weak. There is a 0.6 chance of low costs (and a 0.4 chance of high costs). The probability of strong demand is 0.5 (the probability of weak demand is 0.5). The studio’s profits (in millions of dollars) for the four possible outcomes are shown in the table: demand strong weak cost low 80 10 high 0 -70 a) Should the studio produce the film? Justify your answer using expected profits. b) The studio is concerned that the film’s director might let production costs get out of control. Thus, the studio insists on a clause in the production contract giving it the right to terminate the project after the first $30 million is spent. By this time, the studio will know for certain whether total production costs are going to be low (i.e. under control)…
6) For the payoff table below, the decision maker will use P(s1) = .15, P(s2) = .5, and P(s3) = .35. s1 s2 s3 d1 -5000 1000 10,000 d2 -15,000 -2000 40,000 (a) What alternative would be chosen according to expected value? (b) For a lottery having a payoff of 40,000 with probability p and -15,000 with probability (1-p), the decision maker expressed the following indifference probabilities. Payoff Probability 10,000 .85 1000 .60 -2000 .53 -5000 .50 Let U(40,000) = 10 and U(-15,000) = 0 and find the utility value for each payoff. (c) What alternative would be chosen according to expected utility?
You are at a casino and there are three slot machines you can use to bet on. You must have a return of .5% of higher on what you are betting. Below is the expected returns for each slot machine under various scenarios. What combination of machines do you play to maximize your average return? Decision Variables Data Slot 1 100.0% Monday Tuesday Wednesda Average Slot 2 0.0% Slot #1 8% 4% 5% 5.667% Slot 3 0.0% Slot #2 2% -3% 3% 0.667% Slot #3 6% -2% 4% 2.667% Objective 5.7% Constraints 0.08 >= 0.5% 0.04 >= 0.5% 0.05 >= 0.5% 100.0% .: 100%
3
You are considering investing in one of two projects, which have the following returns and probabilities of occurrence: (a) Compute the mean return for each project.(b) Compute the variance of return for each project.(c) Which project would you prefer, and why?
Q1) An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets.
The Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars): state of nature low demand medium demnad high demand Decision alternative s1 s2 s3 manufacture d1 -20 40 100 purchase d2 10 45 70 The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30. a. Use expected value to recommend a decision. b. Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand.
Speedy Oil provides a single-channel automobile oil change and lubrication service. Customers provide an arrival rate of 4 cars per hour. The service rate is 5 cars per hour. Assume that arrivals follow a Poisson probability distribution and that service times follow an exponential probability distribution. What is the average number of cars in the system? What is the average time that a car waits for the oil and lubrication service to begin? What is the probability that an arrival has to wait for service?
Global Gas International offers to contract the Halidurton Heavy Construction Corporation to build an oil pipeline from Canada to New Orleans that will provide Halidurton $500 million in income. The probability that the oil pipeline will leak, causing environmental damage is 0. If so, the legal liability will be $2,500 million. If Halidurton is risk neutral and liable for the damages from a leak, what is the 0 such that it is indifferent between accepting and rejecting the contract? Halidurton is indifferent between accepting and rejecting the contract if 0 equals rounded to the nearest whole number.) percent. (Enter your response

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