Solution Exercise 10.

2 (page 377)
3.)
Given:

Material Costs
Decision
Stable Increase
Houses P5,375,000 P2,500,000
Shopping Center 7,250,000 2,000,000
Leasing 3,000,000 3,000,000

Maximum payoff Minimum payoff

Solution:
a. Maximax:
Decision Maximax Payoffs
Houses 5,375,000
Shopping Center 7,250,000 maximum
Leasing 3,000,000

Thus, building a housing development will result in Maximax payoff of P7,250,000.

b. Maximin:
Decision Minimax Payoffs
Houses 2,500,000
Shopping Center 2,000,000 minimum
Leasing 3,000,000

Thus, constructing shopping center will result in a minimum payoff of P2,000,000.

c. Minimax Regret Criterion

Largest element in both columns.

Material Costs
Decision
Stable Increase
Houses 5,375,000 2,500,000
Shopping Center 7,250,000 2,000,000
Leasing 3,000,000 3,000,000
Material Costs
Decision Decision Minimax Payoffs
Stable Increase
Houses 1,875,000 Houses Houses 1,875,000
Shopping Center 0 Shopping Center Shopping Center 1,000,000
Decision Minimax Payoffs
Leasing 4,250,000 Leasing Leasing 4,250,000
Houses 1,875,000
Shopping Center 1,000,000

REIGN ROUISE V. GAGALAC

2ND YEAR BSA A
 minimum
Leasing 4,250,000

Thus, constructing a shopping center will result in at most, P1,000,000 in regret.

Solution Exercise 10.2 (page 378)

4.)
Given:

Economic Conditions
Decision
Good Stable Poor
Stocks P250,000 P350,000 P150,000
Bonds 200,000 200,000 200,000
Real Estate -100,000 500,000 300,000

Maximum payoff Minimum payoff

Solution:
a. Maximax:
Decision Maximax Payoffs
Stocks 350,000
Bonds 200,000
Real Estate 500,000 maximum

Thus, investing in Real Estate will result in a maximax payoff of P500,000.

b. Maximin:
Decision Minimax Payoffs
Stocks 150,000 minimum
Bonds 200,000
Real Estate 300,000

Thus, investing in Real Estates will result in a minimum payoff of P150,000.

c. Minimax:

Economic Conditions
Decision
Good Stable Poor
Stocks 250,000 350,000 150,000
Bonds 200,000 200,000 200,000
Real Estate -100,000 500,000 300,000

Economic Conditions
Decision
Good Stable Poor
Stocks 0 150,000 150,000

REIGN ROUISE V. GAGALAC

2ND YEAR BSA A
 Decision Minimax Payoffs
Stocks 150,000
Bonds 300,000
Bonds 50,000 300,000 100,000
Real Estate 350,000
Real Estate 350,000 0 0

Decision Minimax Payoffs

Stocks 150,000 minimum

Bonds 300,000
Real Estate 350,000

Thus, investing in Real Estate will result in at most, P150,000 in regret.

Section Exercise 10.3 (page 378)

1. In a given business venture a businessman can make a profit of P4,000 with
probability 0.80 or take a loss of P2,000 with probability 0.20. Determine her
expectation.
E ( x )=¿ ∑ [ x • P( x ) ¿ ]¿

E ( x )=( 4,000 )( 0.80 )+(2,000)(0.20)

E ( x )=3,200+ 400
E ( x )=P 3,600
Thus, the businessman expects to make a profit of P3,600.

2. The probability that an investor will make a profit of P5,000 on a certain stock is 7/8
and the probability that he or she will take a loss of P2,500 is 1/8. Determine the
expectation of the investor.

E ( x )=¿ ∑ [ x • P( x ) ¿ ]¿

E ( x )=( 5,000 ) ( 7/8 ) −(2,500)(1/8)

E ( x )=4,375−312.5

E ( x )=P 4,062.5

Thus, the businessman expects to make a profit of P4,062.5.

3. A woman purchases a ticket for a certain raffle. The probability that she can win the
first prize of P10,000 is 0.0005 and the probability that she can win the second prize
of P5,000 is 0.05. What is the reasonable prize for her to pay the ticket?

REIGN ROUISE V. GAGALAC

2ND YEAR BSA A
E ( x )=¿ ∑ [ x • P( x ) ¿ ]¿
E ( x )=( 10,000 ) ( 0.005 )−(5,000)( 0.005)
E ( x )=50+250
E ( x )=P 300
The reasonable price of the ticket is P300.

4. The probability that a businessman will make a profit of P2,000 on a given item
during the Christmas holidays is 5/6 and the probability that he might loss of P500 is
1/6. Determine the businessman’s expected profit.
E ( x )=¿ ∑ [ x • P( x ) ¿ ]¿
E ( x )=( 2,000 ) ( 5/ 6 )−(500)(1/6)
E ( x )=1,666.67−83.33
E ( x )=P 1,583.34
The businessman’s expected profit is P1,583.34

5. The probability that a grocer will make profit of P5,000 selling a certain type of fruit
during month of September is 0.75, and the probability that he will take a loss of
P3,000 is 0.25. Determine the expectation of the grocer.
E ( x )=¿ ∑ [ x • P( x ) ¿ ]¿
E ( x )=( 5,000 ) ( 0.75 )−(3,000)(0.25)
E ( x )=3,750−750
E ( x )=P 3,000
The grocer’s expected profit is P3,000.

6. An insurance company insures a house worth P4,500,000 for an annual premium of

P25,000. If the company figures that the probability of the house being burned down
by fire is 0.005, what will be the company’s expected profit.

E ( x )=¿ ∑ [ x • P( x ) ¿ ]¿
E ( x )=( 25,000 ) ( 0.995 )−(25,000)(0.005)
E ( x )=24,875−125
E ( x )=P 24,750
The insurance company’s expected profit is P24,750.

REIGN ROUISE V. GAGALAC

2ND YEAR BSA A
Solution Exercise 10.4 (Page 383)

Low (0.40) 11

30.40
Make Component Medium (0.35)
B 35
High (0.25)

55
A
Buy Component Low (0.40) 17

C Medium (0.35)
29
28.45
High (0.25)
46

REIGN ROUISE V. GAGALAC

2ND YEAR BSA A