Question

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:

What type of decision environment is Ken facing?
A) Risky environment
B) Certainty environment
C) Uncertainty environment
D) Stable environment

What decision criterion should he use?
A) Maximax criterion
B) Maximin criterion
C) Minimax regret criterion
D) Expected Monetary Value criterion

What alternative is best?
A) Sub 100
B) Sub 200
C) Oil J
D) Texan

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

Find the best decision using the adequate technique.
A) Expected Monetary Value (EMV)
B) Decision tree analysis
C) Maximax criterion
D) Minimax regret criterion

How much should Ken pay to know the perfect information about the market condition?
A) $10,000
B) $15,000
C) $20,000
D) $25,000

Is it reasonable for Ken to purchase the perfect information about the market outcomes for $20,000? Explain why.
A) Yes, it reduces potential losses.
B) No, it exceeds the potential benefit.
C) It's a reasonable investment.
D) The cost is irrelevant.

Answer 1

Kenneth Brown is facing an uncertainty environment and should use the Expected Monetary Value criterion to make the best decision. The best alternative cannot be determined without specific values and probabilities.

Step-by-step explanation:

Kenneth Brown is facing an uncertainty environment because he is uncertain about the market conditions and the outcome of his decision.

He should use the Expected Monetary Value (EMV) criterion to make the best decision when information about the probability of each outcome becomes available to him.

The alternative that is best for Kenneth is determined by calculating the expected monetary value for each alternative using the EMV criterion. Without the specific values of each alternative or the probability of each outcome, it is not possible to determine the best alternative.