HELP ASAP!!!
Q1
| MGMT 5312 Fall 2023 Exam 2 | ||||
| This is an open book exam but you are not allowed to consult with anyone. Violation of academic integrity will lead to severe penalty. | ||||
| Answer Q1, Q2 & Q3. You must show your working. | ||||
| You have 3 hours to complete and upload the exam. | ||||
| Q1. (33 points) | ||||
| Miles is considering buying a new pickup truck for his lawn service firm. | ||||
| The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck | ||||
| The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. | ||||
| A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, | ||||
| and a 50% chance that gas prices will stay roughly unchanged. | ||||
| The table below indicates the revenue that Miles can make based on which pickup truck he buys in each of the different states of nature. | ||||
| States of Nature | ||||
| Lower gas prices | Gas prices unchanged | Higher gas prices | ||
| Probability | 0.3 | 0.5 | 0.2 | |
| Alternatives | ||||
| Subcompact | 16,000 | 21,000 | 23,000 | |
| Compact | 15,000 | 20,000 | 22,000 | |
| Full size | 18,000 | 19,000 | 6,000 | |
| a. Based on the Maximin principle what decision should Miles make? (7 points) | ||||
| b. Based on the Maximax principle what decision should Miles make? (7 points) | ||||
| c. Based on the EMV principle what decision should Miles make? (8 points) | ||||
| d. What should Miles be willing to pay for perfect information about which state of nature will prevail? (8 points) |
Q2
| Q2. (33 points) | ||||||||
| Spencer Industries has to choose among a series of new invesment options. | ||||||||
| The net present value of future stream of returns, the capital requirements, and the available capital funds over the next three years are summarized as follows. | ||||||||
| Investment | 1 | 2 | 3 | 4 | 5 | 6 | Funds Available | |
| Net Present Value | $4,000 | $6,000 | $10,500 | $4,000 | $8,000 | $3,000 | ||
| Capital Requirement | ||||||||
| Year 1 | $3,000 | $2,500 | $6,000 | $2,000 | $5,000 | $1,000 | $10,500 | |
| Year 2 | $1,000 | $3,500 | $4,000 | $1,500 | $1,000 | $500 | $7,000 | |
| Year 3 | $4,000 | $35,000 | $5,000 | $1,800 | $4,000 | $900 | $8,750 | |
Q3
| Q3. (34 points) | |||
| a. Given below is the payoff for three decision alternatives, d1, d2 & d3 under three staes of nature, S1, S2, & S3 with probabilities of 0.3, 0.3 & 0.4 respectively. | |||
| What decison should be made based on the EMV criterion? You must show your working. (15 points) | |||
| Payoff Table (in 000’s $) | |||
| S1 | S2 | S3 | |
| Investment A d1 | 300 | 75 | 50 |
| Investment B d2 | 100 | 75 | 50 |
| Investment C d3 | 75 | 75 | 75 |
| Probabilities | 0.3 | 0.3 | 0.4 |
| b. For a lottery having a payoff of 300,000 with a probability p and $50 with a probability of (1-p), two decision makers expressed the following indifference probabilities. | |||
| Find the most preferred decision for each decision maker using the expected utility approach. | |||
| Is there a difference in the decision of the two decision makers. If yes, what can you say about the two decision makers. | |||
| Indifference Probability (p) | |||
| Decision Maker A | Decision Maker B | ||
| 100,000 | 0.7 | 0.6 | |
| 75,000 | 0.5 | 0.2 | |
| 50,000 | 0.3 | 0.15 |
