The Lubricant is an expensive oil newsletter to which many oil giants subscribe, including Ken Brown. In the last issue, the letter described how the demand for oil products would be extremely high. Apparently, the American consumer will continue to use oil products even if the price of these products doubles. Indeed, one of the articles in the Lubricant states that the chances of a favorable market for oil products was 75%, while the chance of an unfavorable market was only 25%. Ken would like to use these probabilities in determining the best decision. (a) What decision model should be used? (b) What is the optimal decision? (c) Ken believes that the $300,000 figure for the Sub 100 with a favorable market is too high. How much lower would this figure have to be for Ken to change his decision made in part b? 2-2 Mickey Lawson is considering investing some money that he inherited. The following payoff table gives the profits that would be realized during the next year for each of three investment alternatives Mickey is considering: State of Nature Decision Alternative Good Economy Poor Economy Stock Market 80000 -20000 Bonds 40000 21000 CDs 25000 25000 Probability . 5 .5 (a) What decision would maximize expected profits? (b) What is the maximum amount that should be paid for a perfect forecast of the economy? (c) Develop an opportunity loss table for the investment problem that Mickey Lawson faces. (d) What decision would minimize the expected opportunity loss? (e) What is the minimum EOL?
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