who is the owner of OilCo. Answer the following questions based on this problem.

Question

who is the owner of OilCo. Answer the following questions based on this problem. States of Nature Alternatives Favorable Unfavorable Sub1002 Oiler J 140,000 -30,000 Texan 230,000150,000 360,000270,000 (a) Which equipment should be selected based on the minimax regret criterion? The probabilities for the market have been determined to be 60% for favorable market and 40% for unfavorable market. (b) Which equipment should be selected to maximize the expected profit of the operation? (c) What is the expected value of perfect information in this situation? (d) Which equipment would minimize the expected opportunity loss?

Explanation / Answer

Ans:

a)For minimizing maximum regret,we should use Sub100,as 130,000 is minimum of all maximum regrets for respective tools.

b)For Maximum expected profit,Texan should be used,as Expected profit is maximum for Texan.

=0.6*360000-0.4*270000=108,000

c)Expected value of perfect information=Expected value with perfect information-Expected value without perfect information

Expected value without perfect information=108,000

Expected value with perfect information=0.6*360000-0.4*30000=204,000

Expected value of perfect information=204,000-108,000=96000

d)

Texan will minimize the expected opportunity loss.

Fav. Unfav. Expected value Sub100 230,000 -150000 78000 Oiler J 140000 -30000 72000 Texan 360000 -270000 108000 Regret Table Fav. Unfav. Maximum Sub100 130,000 120000 130,000 Oiler J 220000 0 220000 Texan 0 240000 240000

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