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Chapter 3 Problems 19, 34, 35, 36, 37

Problem 33 is for 34

6 hours ago

no need to do problem 33

19.The Lubricant is an expensive oil newsletter to which many oil giants subscribe, including Ken Brown (see Problem 3-17 for details). 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 chance 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. (a) What decision model should be used? (b) What is the optimal decision? (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 for Ken to change his decision made in part (b)?

3-33.The game of roulette is popular in many casinos around the world. In Las Vegas, a typical roulette wheel has the numbers 1–36 in slots on the wheel. Half of these slots are red, and the other half are black. In the United States, the roulette wheel typically also has the numbers 0 (zero) and 00 (double zero), and both of these are on the wheel in green slots. Thus, there are 38 slots on the wheel. The dealer spins the wheel and sends a small ball in the opposite direction of the spinning wheel. As the wheel slows, the ball falls into one of the slots, and that is the winning number and color. One of the bets available is simply red or black, for which the odds are 1 to 1. If the player bets on either red or black and that happens to be the winning color, the player wins the amount of her bet. For example, if the player bets \$5 on red and wins, she is paid \$5 and she still has her original bet. On the other hand, if the winning color is black or green when the player bets red, the player loses the entire bet.

34.Refer to Problem 3-33 for details about the game of roulette. Another bet in a roulette game is called a “straight up” bet, which means that the player is betting that the winning number will be the number that she chose. In a game with 0 and 00, there is a total of 38 possible outcomes (the numbers 1 to 36 plus 0 and 00), and each of these has the same chance of occurring. The payout on this type of bet is 35 to 1, which means the player is paid 35 and gets to keep the original bet. If a player bets \$10 on the number 7 (or any single number), what is the expected monetary value (expected win)?

3-35 The Technically Techno company has several patents for a variety of different flash memory devices that are used in computers, cell phones, and a variety of other things. A competitor has recently introduced a product based on technology very similar to something patented by Technically Techno last year. Consequently, Technically Techno has sued the other company for patent infringement. Based on the facts in the case as well as the record of the lawyers involved, Technically Techno believes there is a 40% chance that it will be awarded \$300,000 if the lawsuit goes to court. There is a 30% chance that Technically Techno will be awarded only \$50,000 if it goes to court and wins, and there is a 30% chance that Technically Techno will lose the case and be awarded nothing. The estimated cost of legal fees if Technically Techno goes to court is \$50,000. However, the other company has offered to pay Technically Techno \$75,000 to settle the dispute without going to court. The estimated legal cost of this would be only \$10,000. If Technically Techno wished to maximize the expected gain, should it accept the settlement offer?

3-36 A group of medical professionals is considering the construction of a private clinic. If the medical demand is high (i.e., there is a favorable market for the clinic), the physicians could realize a net profit of \$100,000. If the market is not favorable, they could lose \$40,000. Of course, they don’t have to proceed at all, in which case there is no cost. In the absence of any market data, the physicians’ best guess is that there is a 50–50 chance the clinic will be successful. Construct a decision tree to help analyze this problem. What should the medical professionals do?

3-37 The physicians in Problem 3-36 have been approached by a market research firm that offers to perform a study of the market at a fee of \$5,000. The market researchers claim their experience enables them to use Bayes’ Theorem to make the following statements of probability: Probability of a favorable market given a favorable study = 0.82 Probability of an unfavorable market given a favorable study = 0.18 Probability of a favorable market given an unfavorable study = 0.11 Probability of an unfavorable market given an unfavorable study = 0.89 Probability of a favorable research study = 0.55 Probability of an unfavorable research study = 0.45 (a) Develop a new decision tree for the medical professionals to reflect the options now open with the market study. (b) Use the EMV approach to recommend a strategy. (c) What is the expected value of sample information? How much might the physicians be willing to pay for a market study? (d) Calculate the efficiency of this sample information.

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Above are all the problems. The preferred format is Excel — one workbook — with each problem in its own sheet and each sheet labeled according to the problem.