Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his unive
ID: 328762 • Letter: K
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:
Favorable Market ($)
with probability 70%
Unfavorable Market ($)
with probability 30%
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 $200,000. But Ken has always been a very optimistic decision maker.
Although Ken Brown is the principal owner of Brown Oil, his brother Bob is credited with making the company a financial success. Bob is vice president of finance. Bob attributes his success to his pessimistic attitude about business and the oil industry.
Question 1 of 9
A. Sub 100
B. Oiler J
C. Texan
D. The same as his brother Ken's choice
Question 2 of 9
Question 3 of 9
Question 4 of 9
A. Sub 100
B. Oiler J
C. Texan
Question 5 of 9
EquipmentFavorable Market ($)
with probability 70%
Unfavorable Market ($)
with probability 30%
Sub 100 300,000 –200,000 Oiler J 250,000 –100,000 Texan 75,000 –18,000Explanation / Answer
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
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