K Brown is the principal owner of Brown oil inc, after quitting his university teachihng job, ken has been able to increase his annual salary by a factor of over 100. at the present time, ken is forced to consider purchasing some more equipment for brown oil because of competition. For ex, if ken purchases a Sub 100 and if there is a favorable market he will realize a profit of 300,000. On the other hand if the market is unfavorable ken will suffer a loss of 200,000. But ken has always been very optimistic decision maker Answers:
What type of decision is Ken facing?
*Decision under uncertainty
what decision criterion should he use?
what alternative is best
*He should choose Sub 100, since it has the best possible outcome.
A.) What decision model should be used?
* Ken Brown should use the Maximize Expected Monetary Value (EMV) model.
B.) What is the optimal decision?
* Being the probabilities in the favorable market are 70% and 30% in unfavorable markets i believe the optimal decision would be sub 100 because the EMV is (300,00*.70+(-200,000*.30)=150,000. As opposed to 145,000 and 47,100.
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 fore Ken to change his decision made in part (b)?
Solve for x:
.70x – 200,000(.30) = 145,000
.70x – 60,000 = 145,000
.70x = 205,000
205,000 / .70 = 292,857, Answer: $292,857 (or $7,143 lower)
How many cases of cheese should Jason manufacture each month?
I believe that by producing 8 cases of cheese will provide the highest total expected
profit, of $352.50.