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Concept explainers
a.
Determine the optimal action that is based on the Maximax criterion.
b.
Determine the optimal action that is based on the Maximin criterion.
c.
Find the expected monetary value for actions
d.
Find the expected opportunity loss for actions
e.
Explain the meaning of the
f.
Explain the reason for selecting either of the action from the results of parts (c) and (d).
g.
Find the coefficient of variation for each action.
h.
Find the return-to-risk ratio
i.
Explain the reason for selecting either of the action from the results of parts (g) and (h).
j.
Compare the results of parts (f) and (i) and explain any difference.
k.
Compare the results of parts (f) and (i) if the probabilities for the three events were 0.1, 0.1, 0.8, respectively.
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Chapter 20 Solutions
Basic Business Statistics Student Value Edition Plus NEW MyLab Statistics with Pearson eText -- Access Card Package (13th Edition)
- For the following payoff table, the probability of event 1 is 0.8, the probability of event 2 is 0.1, and the probability of event 3 is 0.1 ACTION ACTION EVENT A ($) B ($) 1 50 10 2 300 100 3 500 200 a. Determine the optimal action based on the maximax criterion b. Compute the Expected Monetary Value (EMV) for action A c. Explain the meaning of the Expected Value of Perfect Information (EVPI) in this problemarrow_forwardLet a shoe company know that 40% of the models it produces will be sold in good economic conditions, in the middle 50% and in bad economic conditions 10%. Accordingly, the monetary values to be obtained for the X,Y, Z and T models it produces are as in the table. Calculate the expected value of complete information.arrow_forward3. What would be the yearly premium for a $50,000 insurance policy against accidental household flood if the likelihood of an accidental household flood is estimated to be 0.005 and the company wishes to have a yearly expected gain of $2000? a. $2, 250. b. $2,550. c. $2,500. d. $2,520. 4. A manufacturer of electronic equipment buys spare parts for replacement and repairs in lots of one-thousand from the supplier. The manufacturer uses these spare parts to fix items under warrantee. Past historical records show that the probability of any one spare part being defective is unlikely and assumed to be one in one-thousand. In a shipment of one-thousand spare parts the probability of two defectives is a. 0.148. b. 0.184. c. 0.366. d. 0.386. 5. What is the probability of getting exactly three heads in five flips of a balance coin? a. 5/16 b. 3/16 c. 7/16 d. 9/16arrow_forward
- The government is attempting to determine whetherimmigrants should be tested for a contagious disease. Let’sassume that the decision will be made on a financial basis.Assume that each immigrant who is allowed into the countryand has the disease costs the United States $100,000, andeach immigrant who enters and does not have the diseasewill contribute $10,000 to the national economy. Assumethat 10% of all potential immigrants have the disease. Thegovernment may admit all immigrants, admit no immigrants,or test immigrants for the disease before determiningwhether they should be admitted. It costs $100 to test aperson for the disease; the test result is either positive ornegative. If the test result is positive, the person definitelyhas the disease. However, 20% of all people who do havethe disease test negative. A person who does not have thedisease always tests negative. The government’s goal is tomaximize (per potential immigrant) expected benefits minusexpected costs. Use a decision…arrow_forwardAn investor is concerned with the market return for the coming year, where the market return is defined as the percentage gain (or loss, if negative) over the year. The investor believes there are five possible scenarios for the national economy in the coming year: rapid expansion, moderate expansion, no growth, moderate contraction, and serious contraction. Furthermore, she has used all of the information available to her to estimate that the market returns for these scenarios are, respectively, 23%, 18%, 15%, 9%, and 3%. That is, the possible returns vary from a high of 23% to a low of 3%. Also, she has assessed that the probabilities of these outcomes are 0.12, 0.40, 0.25, 0.15, and 0.08. Use this information to describe the probability distribution of the market return. Compute the following for the probability distribution of the market return for the coming year.: 1. Mean, 2. Variance, 3. Standard deviation Show your solutions.arrow_forwardEngr. Sasuke of Hokage Design and Build Company has two bidding appointments on a given day. At the first appointment, he believes that he has a 80% chance to make the deal, from which he can earn 10,000 pesos commission if successful. On the other hand, he thinks he only has a 45% chance to make the deal at the second appointment, from which, if successful, he can make 15,000. What is his expected commission based on his own probability belief? Assume that the appointment results are independent of each other. a) 20,750 b) 17,750 c) 15,750 d) 14,750arrow_forward
- A proposed project has the following cash flow estimates. Assuming independent cash flows, a normally distributed net present value, and a minimum attractive rate of return of 18%, determine the following. For the following questions, employ an analytical solution: a. The mean and standard deviation of net present value. b. The probability that the net present value is positive. c. The probability that the net present value is greater than $5,000. Assume the initial investment and annual receipts are normally distributed. d. Using a Monte Carlo simulation with 10,000 iterations, estimate the probability that the present worth is positive and estimate the probability that the present worth is greater than $5,000.arrow_forwardAn insurance company offers its policyholders a number of different premium payment options. For a randomly selected policyholder, let X = the number of months between successive payments.arrow_forwardA forward contract exists for a unit of two-year government securities with delivery to take place three years from now. Suppose the price of these securities three years from now is uniformly distributed from a low $800 to a high of $1,400. The one-year expected riskless rate of interest is 5 percent for all periods under consideration. If investors are risk neutral, what should be the current forward price? Suppose now that investors are risk averse and that the forward price is $1,200. What do you know about the relationship between the market value of two-year government securities and overall consumption? Continue to assume (as in (ii)) that the current forward price (at time 0) is $1,200. One year from now (at time 1) the forward price for the same item and same delivery date is $1,000. Determine the time 1 value (to the buyer) of the contract that was agreed upon at time 0.arrow_forward
- For the following payoff table, the probability of event 1 is 0.8, the probability of event 2 is 0.1, and the probability of event 3 is 0.1 ACTION ACTION EVENT A ($) B ($) 1 50 10 2 300 100 3 500 200 1. Compute the coefficient of variation for action A 2. Compute the coefficient of variation for action B 3. Determine the optimal action based on the maximin criterionarrow_forwardA proposed project has the following cash flow estimates.Assuming statistically independent cash flows, a normally distributed net present value, and a minimum attractive rate of return of 15%, determine the following. For the following questions, employ an analytical solution: a. the mean and standard deviation of net present value. b. the probability that the net present value is negative. c. the probability that the net present value is greater than $1,000,000. Assume the initial investment and annual receipts are normally distributed. d. Using a Monte Carlo simulation with 10,000 iterations, estimate the probability that the present worth is negative.arrow_forwardABC Construction Company is going to decide whether they are going to expand their business, build an additional facility, or subcontract a partner company. The research and development department forecasted the following payoff values which are summarized in the table below. The values are expressed as GAINS and alpha = 0.6. Come up with a decision using the different criteria under conditions of uncertainty:arrow_forward
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