An AUD student, who travels from Sharjah to University, plans to buy a car to at

Question

An AUD student, who travels from Sharjah to University, plans to buy a car to attend classes at AUD. Since the student is very poor, the student wants to buy a car which requires minimum amount to buy gas. The student got an estimate from dealers, the weekly gas consumption prices of different brands of cars. However, based on the three states Favorable, Stable and Unfavorable, the gas prices vary. The states probabilities are respectively 0.25, 0.35, and 0.40. The pay offs are the estimated weekly gas expenses for the cars in Dirhams. (Use two decimals, do not round even if you get decimal values) Considering the current information, a.) Recommend the student to choose the brand using expected value approach, and potential expected weekly expenses b) Recommend the student to choose the brand using expected opportunity loss method. c) Also find out the total expenses of the student if he hires a consultant for AED 40.

Explanation / Answer

Part A)

We calculate the expected payoff as an expense under each of the three cars.

We find that Honda has the least expense for gas, So should choose honda.

Part B)

We calculate expected opportunity loss table.

To calculate the above table we take the diagonal value and substract the values under each column from the diagonal value. And finally find the expected value.

We see the highest is the best ( Since the table is for expenses ) hence Again honda is the decision.

Part C)

if the student hires consultant, he has to pay 40 as an expense.

So total expense when he choose Honda is

326.1 + 40 = 366.1

Favorable stable unfavorable Expected payoff Probability 0.25 0.35 0.4 Toyota 288 186 585 371.1 Honda 238 436 285 326.1 Audi 188 586 585 486.1

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