ECO 86501 Assn17 Problem fogel graded
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
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