Question

In Chapter 3, we begin to look at how to use data to make decisions. It...

In Chapter 3, we begin to look at how to use data to make decisions. It is not enough to say, "the answer is $2,100." Rather, what do we do with this information to make good choices?

Your assignment for this discussion section is to learn how to use the Expected Monetary Value (EMV) to help you make decisions.

Here’s your task: You have been asked to decide whether your company should build a new factory in Alabama.

  • If you build it and things go well, you could make a lot of money, but if the economy goes bad, you could lose a lot of money (and maybe your job, too).
  • If you choose not to build it and the economy goes bad, you’ve made the right decision because you haven’t lost any money. On the other hand, if you don’t do anything and the economy does really well, you’ve missed a terrific opportunity to make a profit.

How do you use the EMV to do this? Let me show you...

Here’s your grid:

Outcomes

Good Economy              Bad Economy

Your Choices:

            

o Build the factory o Don’t build the factory

A

B

C

D

Probabilities

P1

P2

1. From the following choices, randomly pick how much money you would make if you chose to build the factory and things went well. (You can’t go wrong with any choice; just pick one.) Put that amount in Box “A.” (value: 5 points)

Box “A” choices

  • $100,000 •           $125,000         •           $105,000
  • $75,000     •           $65,000          •           $90,000 •        $50,000          •           $200,000       •           $45,000

2. From the following menu, pick how much money you would lose if you chose to build and the economy went down. (As with Step 1, you can’t go wrong with any choice; just pick one.J) Put that amount in Box “B.” NOTE: Notice that all of these values in Box B are negative: be sure and put the negative number in your calculations! (value: 5 points)

Box “B” choices

  • -$100,000             •           -$115,000       •           -$75,000
  • -$85,000 •           -$165,000       •           -$45,000
  • -$55,000 •           -$105,000       •           -$110,000
  1. Put zeroes (“0”) in Boxes “C” and “D” because you aren’t doing anything that would let make or lose money. (value: 5 points)
  1. Choose one of the possible combinations of probabilities. (Again, just choose one of these nine choices; you can’t go wrong.) Put the value of P1 (the chance of a good economy) in Box “P1.” Put the value of P2 (the chance of a bad economy) in Box “P2.” (Note how both numbers always add to 100 %.) (value: 5 points)

Choices for Box P1 and Box P2

  • P1 = 75% P2 = 25%           •           P1 = 70% P2 = 30%     •           P1 = 10% P2 = 90%
  • P1 = 55% P2 = 45%           •           P1 = 50% P2 = 50%      •           P1 = 45% P2 = 55%
  • P1 = 66% P2 = 34%           •           P1 = 40% P2 = 60%      •           P1 = 25% P2 = 75%

5. Now that you’ve made your choices and have a complete grid, use your notes to do an EMV with the data you’ve entered. Use the Discussion Board to answer the following:

  • What values did you choose from Box A, Box B, and Boxes P1 and P2? (value: 20 points)
  • What EMV amount do you come up with? (value: 50 points)
  • What is your EMV decision? In other words, do you build, or not? (value: 30 points)
0 0
Add a comment Improve this question Transcribed image text
Answer #1
Choices Good Economy Bad Economy
Build the factory $125,000 - $85,000
Don't build the factory $ 0 $ 0
Probabilities 50% 50%

Part 5: (i) Box A = $ 125,000 Box B = $ 85,000

Box P1 = 0.5 Box P2 = 0.5

Expected Monetary Value (EMVB) = 0.5 x 125000 + 0.5 x (- 85000)

EMVB =  $ 20,000

EMVDB =  $ 0

Clearly, since the building of the factory gives us a higher expected payoff, the decision is to build the factory at 50 percent probabilities of good and bad state of the economy.

$ 20,000 is the contingency reserve that should be maintained in case of bad state of the economy.

Add a comment
Know the answer?
Add Answer to:
In Chapter 3, we begin to look at how to use data to make decisions. It...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Chapter 10.9, Problem 1Q. How do you calculate the P2/P1 and (1+1/e1 )/(1+1/e2 ) for part b on pr...

    Chapter 10.9, Problem 1Q. How do you calculate the P2/P1 and (1+1/e1 )/(1+1/e2 ) for part b on problem 9.1 in Chapter 10? Please show calculation. The Jam Factory makes boutique jams that it sells in specialty stores in two different cities. In City 1, the daily inverse demand function is p1 = 12 - 0.5Q1 and the marginal revenue function is MR1 = 12 - Q1. In City 2, the inverse demand and marginal revenue functions are p2 =...

  • Every day, we make many decisions based on our needs, our assets, and our desires and...

    Every day, we make many decisions based on our needs, our assets, and our desires and what is available to meet these. A Recommendation Report is simply a formalized written statement of this that businesses use to make decisions. They often use it to make decisions to purchase equipment or to make decisions to move or change something, perhaps even whether or not they need to hire workers. First, a business must decide what is the issue. In the case...

  • This week we study how consumers make decisions to maximize their benefit (most satisfaction, biggest "bang...

    This week we study how consumers make decisions to maximize their benefit (most satisfaction, biggest "bang for a buck"). But what if decisions are made for us as it is the case with gifts? Do gifts maximize our benefit? Is there more to gifts than just monetary value? Earlier this week, Waldfogel was at it again in a webcast for members of the media that was sponsored by the National Science Foundation. Here is just some of his math: Americans...

  • Once again we will create a program that tells us how many months we need to...

    Once again we will create a program that tells us how many months we need to save to reach a goal. This time however, using recursive functions. The guidelines are the following:  In main, ask the user for the initial amount, the goal and the “monthly amount” (the constant amount of money that will be put aside every month).  Once you have these values you should call your function. Your function should not return anything and it should...

  • Summarize the article and how does it relate to time value of money The finance department...

    Summarize the article and how does it relate to time value of money The finance department and CFOs are getting closer and closer to the marketing department, and for once, it’s not because marketing is asking for more budget. Here’s why your CFO peers are shifting into digital strategy, how they’re interacting with the marketing department and what your organization can do to increase alignment. The Time Value Of Money Investing, at its very core, is about patience. You put...

  • IN PYTHON Up until now, we have learned about printing text to the screen, functions, parameters,...

    IN PYTHON Up until now, we have learned about printing text to the screen, functions, parameters, loops, how to get input from users, text processing, and how to use if/else statements to have different execution paths. Everything we need in order to make our first game! For this assignment write a text-adventure game. Your game must have the following: at least 4 choices the player must make a different outcome for each of the 4 choices For extra points, draw...

  • Chapter 8 Helping a friend. Suppose you fully intend to spend the evening working on an...

    Chapter 8 Helping a friend. Suppose you fully intend to spend the evening working on an Excel assignment that’s due the next day. Then a friend calls. Your friend is stranded miles from home and desperately needs your help. It will take most of the evening to pick up your friend, bring him home, and return to your studying. Not only that, but you’re very tired when you get home and just fall into bed. The next day your friend,...

  • Instructions: You learned about how businesses use capital budgeting tools to evaluate long-term investment decisions. We...

    Instructions: You learned about how businesses use capital budgeting tools to evaluate long-term investment decisions. We may be using these techniques (even if subconsciously) to make some personal life decisions. In this discussion, I encourage you to think about one such decision: your decision to attend UTRGV. Attending college has direct and opportunity costs, and you expect to benefit from this decision in the future. Think about and note down the following. Use rough approximations. 1.       What is your cost of...

  • Project 4 This project asks you to make decisions based on what you have learned in...

    Project 4 This project asks you to make decisions based on what you have learned in this course so far. Each question below is worth 10 points. Some questions could be answered in different ways depending on your reasoning. You will not receive any credit for a question if you do not support your reasoning. Please type your responses to each question following the prompts. Feel free to add space as needed. Attempt to stay orderly and put your answers...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT