The fixed cost of $6 million in the Acme problem is evidently not large enough to make Acme abandon the product at the current time. How large would the fixed cost need to be to make the abandon option the best option?
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The fixed cost of $6 million in the Acme problem is evidently not large enough to make Acme abandon the product at the current time. How large would the fixed cost need to be to make the abandon option the best option? Explain how the decision tree, especially the version in Figure 9.5, answers this question easily.
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- The fixed cost of $6 million in the Acme problem is evidently not large enough to make Acme abandon the product at the current time. How large would the fixed cost need to be to make the abandon option the bestoption? Explain how the decision tree, especially the version in Figure 9.5, answers this question easily.If you want to invest in a project that cost $3.5 million. As we are unsure about the future demand, there is a 40% probability of high demand with a present value for the project $3 million. There is a 25% probability of moderate demand with a present value of $2.5 million. In addition, there is a 35% probability of low demand with a present value is $1.5 million. Draw a decision tree for this problem. What is the expected net present value of the business? Should you invest? Explain. Assume that you can expand the project by investing another $0.6 million after you learn the true future demand state. This would make the present value of the business $3.9 million in the high‐demand state, $3.5 million in the moderate demand state, and $1.80 million in the low demand state. Draw a decision tree to reflect the option to expand. Evaluate the alternatives. What is the net present value of the business if you consider the option to expand? How valuable is the option to expand?You often hear about the trade-off between risk and reward. Is this trade-off part of decision making under uncertainty when the decision maker uses theEMV criterion? For example, how does this work in investment decisions?
- Many decision problems have the following simplestructure. A decision maker has two possible decisions,1 and 2. If decision 1 is made, a sure cost of c isincurred. If decision 2 is made, there are two possibleoutcomes, with costs c1 and c2 and probabilities p and1 2 p. We assume that c1 , c , c2. The idea is thatdecision 1, the riskless decision, has a moderate cost,whereas decision 2, the risky decision, has a low costc1 or a high cost c2.a. Calculate the expected cost from the riskydecision.b. List as many scenarios as you can think of thathave this structure. (Here’s an example to get youstarted. Think of insurance, where you pay a surepremium to avoid a large possible loss.) For eachof these scenarios, indicate whether you wouldbase your decision on EMV or on expected utility.Answer A.2 a-e a-c is in the picture here is d and e d) What is the qually likely decision? e) Develop a decision tree. Assume each outcome is equally likely, then find the highest EMV.Further, by applying relevant managerial principles (which you should mention here) to surmount this conflict show why it would be rational to invest in other investment options other than building flats to resolve this investment choice problem you are confronted with? What principle would be relevant to the understanding of variation of factors of investment in the SR and LR?
- Using the following table, perform ALL FIVE of the techniques for Decision Making under Uncertainty: Maximax, Maximin, Hurwicz Realism (α = 0.7), LaPlace and Minimax Regret. Use the .50 for the probability of a Good Economy and .50 for the probability of a Poor Economy. You must show your work. STATE OF NATURE DECISION ALTERNATIVE GOOD ECONOMY POOR ECONOMY Sotck market 80,000 -20,000 Bonds 30,000 20,000 CDs 23,000 23,000Which investment should Warren make under each of the following criteria? a. Maximax criterion. b. Maximin criterion. c. Maximum likelihood criterion. d. Bayes’ decision rule. e. The investor decides that Bayes’ decision rule is his most reliable decision criterion. He believes that 0.1 is just about right as the prior probability of an improving economy, but is quite uncertain about how to split the remaining probabilities between a stable economy and a worsening economy. Therefore, he now wishes to do some sort of sensitivity analysis with respect to these latter two prior probabilities. If he still wants to choose the alternative from the Bayes’ decision rule (part d): e1. How much would be the maximum amount of the prior probability of a stable economy? e2. How much would be the minimum amount of the prior probability of a worsening economy?Using the following table, perform ALL FIVE of the techniques for Decision Making under Uncertainty: Maximax, Maximin, Hurwicz Realism (α = 0.7), LaPlace and Minimax Regret. Use the .50 for the probability of a Good Economy and .50 for the probability of a Poor Economy. You must show your work for obtaining the points. STATE OF NATURE DECISION ALTERNATIVE GOOD ECONOMY POOR ECONOMY Sotck market 80,000 -20,000 Bonds 30,000 20,000 CDs 23,000 23,000
- 2. Using the following table, perform ALL FIVE of the techniques for Decision Making under Uncertainty: Maximax, Maximin, Hurwicz Realism (α = 0.7), LaPlace and Minimax Regret. You must show your work for obtaining the points. PROFIT ($) STRONG MARKET FAIR MARKET POOR MARKET Large facility 550,000 110,000 -310,000 Medium-sized facility 300,00 129,000 -100,000 Small facility 200,000 100,000 -32,000 No facility 0 0 0Imagine that you have the following pair of concurrent decisions. First examine both decisions, then indicate the options you prefer. Decision 1: Choose betweenA a sure loss of 1500B a 75% to lose £2000 and 25% chance to lose nothing Decision 2: Choose betweenC a sure gain of £480D a 25% chance to gain £2000 and 75% chance to gain nothing How do you think respondents in a laboratory experiment would decide in Decision 1 and Decision 2? most participants will choose 1B and 2C most participants will choose 1A most participants will choose 1B and 2D most participants will choose 1A and 2D 2) Which of the following can explain the behavior in the lab for decision 1? preference for certainty underestimation of large probabilities individuals are risk loving in the loss domain overweighting of small probabilities concavity of the value function in the gain domain 2. individuals are risk loving in the loss domainConsider a public project with the cost of 500. There are three individuals with the following benefits for the public good: v1=400, v2=200 and v3=0. Which of the following statement is false about the VCG (Vickrey-Clarke-Groves) mechanism? None of the options The budget deficit is 200 VCG mechanism is strategy-proof The tax for individual 3 is equal to 0 The tax for individual 1 is equal to 300