QUESTION 6 Miles is considering buying a new pickup truck for his lawn service f
ID: 406552 • Letter: Q
Question
QUESTION 6
Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.
States of Nature
Alternatives
Lower gas prices
Gas prices unchanged
Higher gas prices
Probability
.3
.5
.2
Subcompact
$16,000
$21,000
$23,000
Compact
$15,000
$20,000
$22,000
Full size
$18,000
$19,000
$6,000
Calculate the expected monetary value for subcompact?
States of Nature
Alternatives
Lower gas prices
Gas prices unchanged
Higher gas prices
Probability
.3
.5
.2
Subcompact
$16,000
$21,000
$23,000
Compact
$15,000
$20,000
$22,000
Full size
$18,000
$19,000
$6,000
Explanation / Answer
Expected monetary value is the total of the weighted outcomes associated with a decision.
EMV = (16000 x 0.3) + (21000 x 0.5) + (23,000 x 0.2)
= 4,800 + 10,500 + 4,600
= 19,900
The expected monetary value for subcompact is 19,900
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.