2. [20 points] Kenneth Brown is the principal owner of Brown Oil, Inc. At the present time,...
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2. [20 points] Kenneth Brown is the principal owner of Brown Oil, Inc. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are shown in the following table:
| EQUIPMENT | FAVORABLE MARKET ($) | UNFAVORABLE MARKET ($) |
| Sub 100 | 300,000 | 200,000 |
| Oiler J | 250,000 | 100,000 |
| Texan | 75,000 | 18,000 |
For example, 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 a very optimistic decision maker.
a. What type of decision is Ken facing?
- What decision criterion should he use?
- What alternative is best?
- If a pessimistic approach is used, what criterion should be used?
- What alternate should be selected with pessimistic approach?
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