Question 2: Problem solving (11 Marks)

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 a 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 shown in the following table:

1. What type of decision environment is Ken facing? (1 Mark)

Ken is facing decision under uncertainty since there are several possible outcome foe each alternative and the section maker dose not know the probability of the various outcome

2. What decision criterion should he use? (1 Mark)

Since ken is an optimistic decision maker, he should use the maximum criterion to find the alternative that maximizes the maximum payoff or the consequence for each alternative.

3. What alternative is best? (2 Mark)

he best alternative decision for him is if he will purchase sub 200 which will gain profit in all kinds of market whether favorable,moderate or unfavorable one.

If information about the probability of each outcome becomes available to Ken then:

Questions:

4. Find the best decision using the adequate technique. (3 Marks)

5. How much Ken should pay to know the perfect information about the market condition? (3 Marks)

6. Is it reasonable for Ken to purchase the perfect information about the market outcomes for $20,000? Explain why. (1 Mark)