MATH 318, Chapter 4 Quiz

Name:
You may use a calculator on this quiz. You may not use a cell phone or computer. Please show your work carefully and give justifications for your answers. If you find that you are spending a lot of time on one problem, leave it blank and move on to the next. There are questions on both sides of each page.
Consolidated Candy Company (CCC) is trying to decide between aquiring the Emack and Bolio's ice cream chain or buying equipment to launch a new line of designer chocolate lobsters.

If forecasts of global warming are accurate, CCC can expect $300,000 in profits from Emack and Bolio's over the next five years as compared to $100,000 from the chocolate lobsters. If the global warming forecast is not accurate, they predict only $150,000 in profits from the ice cream versus $200,000 from the chocolate lobsters.

  1. (15 points) Make a payoff table to help CCC with their decision making process. Check your work carefully.

     

     

     

     

     

     

     

     

  2. (10 points) What decision does the conservative decision making strategy recommend?

     

     

     

     

     

  3. (15 points) If the probability that global warming forecasts are correct is 60%, what decision does the expected value approach recommend? Show your work.

     

     

     

     

     

  4. (15 points) Sketch a risk profile for the chocolate lobster decision.

     

     

     

     

     

     

     

     

     

  5. (15 points) Find the expected value of perfect information for CCC.

     

     

     

     

     

  6. (15 points) CCC may be able to increase profits by improving the efficiency of the air conditioning in their factories. Assuming global warming forecasts are accurate, what would the expected value of chocolate lobsters have to be in order to change the decision recommended by the expected value approach?

     

     

     

     

     

     

     

  7. (15 points) Draw a decision tree for CCC. Be sure to include the two decisions of whether to invest in ice cream or lobsters and whether to improve refrigeration efficiency. Also include the chance event corresponding to global warming.

     

     

     

     

     


Bonus (5 points) Refer to your original payoff table. What decision does the minimax regret strategy recommend?