ECO 86501 Assn17 Problem fogel graded

Topics: Hurricane Katrina, Economic shortage, Monopoly Pages: 10 (1037 words) Published: January 28, 2015


Chapter 15:
Decisions Under Risk and Uncertainty

Answers to Applied Problems

1. a.At the maximax rule the firm should operate plants in US, Mexico, Canada b.At the maximin rule the firm should operate plants in US only c.The potential regret matrix is:

OINC Passes

OINC Fails

OINC Stalls

US only

10 million

0

2 million

US and Mexico

5 million

3 million

2.5 million

US, Mexico, Canada

0

5 million

0

And the maximum potential regrets are:

US only

10 million

US and Mexico

5 million

US, Mexico, Canada

5 million

Thus the firms minimax regret rule should operate either operate in US and Mexico or operate in US, Mexico, and Canada.

d.The average payoffs are:

US only

11/3 = 3.7 million

US and Mexico

12.5/3= 4.2 million

US, Mexico, Canada

18/3= 6.0 million

The firm’s equal probability rule is to operate in US, Mexico, and Canada.

4.

B. From the expected profit, Remox should choose Option A

e.Remox decision cannot use mean-variance rule since option A has both higher expected profit and higher risk than option B.

f.Remox’s decision in using the coefficient of variation rule is as follows:

From the above calculation, the coefficient of variation rule for Remox would be option B.

5.a.For maximax rule Remox should use option A
b.For maximin rule Remox should use option B
c.For minimax regret Remox should use option A
d.For equal probability criterion rule Remox should use option A

Chapter 16:
Government Regulation of Business

Answers to Applied Problems

2. When there is a shortage in the industry or firm, it will definitely result in an under allocation of resources. Under allocation can happen without any shortage. For example, if the market is in a monopolistic stage, there is no shortage. The buyers can buy everything they want at a set price. There are various situations where the market can fail due to under allocation of resources that are not caused by shortages. For instance, if the task of painting a building was scheduled to finish at a certain date and there was not enough paint and painters, the manager did not allocate and did not calculate the correct amount of paint needed and did not have enough painters. Thus, a shortage is not a necessary condition for under allocation of resources.

4. Price gouging seems to occur after natural disasters such as hurricane Katrina, Rita, and Sandy. After a disaster, the community is trying to recover from the homes that they have lost and they are trying to get back on their feet. However, many individuals and companies are charging market prices for goods such as gasoline, bottled water and other necessary items at a higher price than the market. According to the FTC price gouging laws are not required, they are counterproductive. For instance, in 2005, after the hurricane Katrina and Rita, it caused a shortage in gasoline and it could have possibly triggered an energy emergency (National Center, 2007). If anti-gouging laws are enforced by legislation to lower gas prices than what the market dictates during a supply shortage, FTC said that wholesalers and retailers will run out of gasoline and consumers will be worse off (Strassel, 2001). Furthermore, anti-gouging laws end up punishing companies who have excess and reserves in advance during a crisis. For instance in the Katrina hurricane, one of the lessons learned was to reward companies who have excess of oil and gas at the time when it is greatly needed. With anti-gouging laws, there is no incentive for the companies to carry extra inventory (Wall Street Journal, 2005). Therefore, from the various reasons stated above, I think an anti-gouging law does not really protect consumers. Anti-gouging laws may assist in rationing gasoline and bottled water but in the end no matter how you look at it,...
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