Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by factor of over 100. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are as follows:

Equipment Favorable Market Unfavorable Market ($)

Sub 100 $300,000.00 $-200,000.00

Oiler J $250,000.00 $-100,000.00

Texan $ 75,000.00 $ -18,000.00

a) Ken is very optimistic, what type of decision is Ken facing?

What decision criterion should he use?

What alternative is best?

Ken's brother Bob is credited with making the company a financial success. Bob is vice president

of finance. Bob attributes his success to his pessimistic attitude about business and the oil industry.

b) What decision criterion should Bob use?

What alternative will he select?

Ken's other brother, Tom, can't decide if he is optimistic or pessimistic. Tom is the vice president of operations. Tom believes his coefficient of realism a, is .75

c) What decision criterion should Tom use?

What alternative will he select?

Ken's sister, Cindy, likes to use the average payoff to make her decisions. Cindy is the vice president of human relations.

d) What decision criterion should Cindy use?

What alternative will she select?

The Lubricant is an expensive oil newsletter to which many oil giants subscribe, including Ken Brown. In the last issue, the letter described how the demand for oil products would be extremely high. Apparently the American consumer will continue to use oil products even if the price of these products doubles. Indeed, one of the articles in the Lubricant states that the chances of a favorable market for oil products was 70%, while the chance of an unfavorable market was only 30%. Ken would like to use these probabilities in determining the best decision.

e) What decision model should be used?

What is the optimal decision?

f) What is the maximum amount that should be paid for a perfect forecast of the economy

g) Develop an opportunity loss table.

What is the minimax regret decision?

h) What approach would Ken use to minimize expected opportunity loss.

What is the expected opportunity loss decision?

i) Considering all the decisions calculated above, what do you think Ken should do?