Student_______________________________ ID________________

DT & T

SET OF PROBLEMS
MaxGrade = (30% +3%) of Total Grade

Problem 1. (max 6 pts)

Consider the following payoff table of Profits(prior probabilities are in
parentheses)
S1 (0.3) S2 (0.45) S3 (0.25)
d1 0.49 0.2 -0.41
d2 0.4 -0.3 0.3
d3 -0.4 0.4 0.5
d4 0.2 -0.2 0.3
a. (max 0.5pts) Which decision is prescribed by the optimistic criterion?
b. (max 1pt) Which decision is prescribed by the conservative criterion?
c. (max 2.25pts) Which decision is prescribed by the minimax regret criterion?
d. (max 2.25pts) Which decision is prescribed by the expected value criterion?

Problem 2. (max 6pts)

A firm has three investment alternatives. Payoffs are in thousands of dollars.
Economic Conditions
Decision Alternative Up s1 Stable s2 Down s3
Investment A, d 1 1000 250 -200
Investment B, d 2 500 500 500
Investment C, d 3 750 500 250
Probabilities 0.30 0.50 0.20
a. (max 2pts) What is the best expected value decision?
b. (max 1pts) What lottery would be used to assess utilities?
c. (max 1pt) Assume that the following utilities are assigned.
Profit Indifference Probability
$750,000 0.85
$500,000 0.65
$250,000 0.3
Do the utilities reflect the behavior of a risk taker or a risk avoider?
d. (max 2 pts) Use expected utility to make a recommended decision.
Problem 3. (max 6 pts)
CompanyAandCompanyB,arecompetingforagivenconsumermarket.Eachcompany
isconsideringfouradvertisingoptions.Dependingontheoptionsusedbyeachcompany,acertain
percentageofconsumerswillswitchfromonecompanytotheother.Afterperformingmarket
studies,itwasdeterminedthattheentriesinthepayofftable(below)representthepercentageof
CompanyBcustomersthatwillswitchtoCompanyA.
Company B
b1 b2 b3 b4
a1 21 9 18 15
a2 3 -3 6 9
a3 15 21 0 -3
a4 15 3 9 12

Company A
a. (max 1 pt) Does the game have a saddle point and a pure strategy?
b. (max 1 pt) Reduce the game to 2x2 game.
c. (max 3.5 pts) Determine the optimal mixed strategy solution.
d. (max 0.5 pts) What is the value of the game?

Problem 4. (max 7 pts)

The fixed cost for the all production and selling process of a product is 216, the cost to
produce and sell one unit of the product is 20. The demand function has the following form
p Q 263 27Q .
a. (max 2 pts) Express revenue as a function of Q. Find the output that will produce the maximum
revenue. What is the maximum revenue
b. (max 2 pts) Graph the cost function and the revenue function in the same coordinate system;
c. (max 1.5 pts) Find break-even points;
d. (max 1.5 pts) How many cameras should the company manufacture to maximize its profit? What
is the maximum profit?

BONUS (3pts max)

In a suburb of Astana, housing have been decreasing at 12% per year compounded annually for the
past 2 years. A house with a $200,000 value now would have had what value 2 years ago?