Transcript Management Science BUS 340

Management Science
BUS 340
Chapter 3
Problem 3-18
Kelly Devilbiss
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(a) What decision model should be used?
Answer:
Ken Brown should use the Maximize
Expected Monetary Value (EMV) model.
Kelly Devilbiss
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(b) What is the optimal decision?
Equipment
Sub 100
Favorable
Market ($)
300,000
Unfavorable
Market ($)
EMV
-200,000
(300,000*.70)+
(-200,000*.30)=
150,000
Oiler J
250,000
-100,000
(250,000*.70)+
(-100,000*.30)=
145,000
Texan
75,000
-18,000
(75,000*.70)+
(-18,000*.30)=
47,100
Probabilities
70%
30%
Kelly Devilbiss
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(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)
Kelly Devilbiss
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