Decision Analysis Problem

3-21 Allen Young has always been proud of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. ver the past several months! however! Allen has become very concerned about the stock market as a good investment. "n some cases it would have been better for Allen to have his money in a bank than in the market. #uring the ne$t year! Allen must decide whether to invest %1&!&&& in the stock market or  in a certificate of deposit '(#) at an interest rate of *+. "f the market is good!  Allen believes that he could get a 1,+ return on his money. ith a fair market! he e$pects to get an + return. "f the market is bad! he will most likely get no return at all-in other words! the return would be &+. Allen estimates that the probability of a good market is &.,! the probability of a fair market is &.,! and the probability of a bad market is &.2! and he wishes to ma$imi/e his long-run average return. 'a) #evelop a decision table for this problem. 'b) hat is the best decision0 3-22 "n roblem 3-21 you helped Allen Young determine the best investment strategy. ow! Young is thinking about paying for a stock market newsletter. A friend of Young said that these types of letters could predict very accurately whet wh ethe herr th the e ma mark rket et wou ould ld be go good od!! fa fair ir!! or po poor or.. h hen en!! ba base sed d on th thes ese e predictions! Allen could make better investment decisions. 'a) hat is the most that Allen would be willing to pay for a newsletter0 'b) Young now believes that a good market will give a return of only "" + instead of 1,+. ill this information change the amount that Allen would be willing to pay for the newsletter0 "f your answer is yes! determine the most that Allen would be willing to pay! given this new information. 3-2 A group of medical professionals is considering the construction of a private clinic. "f the medical demand is high 'i.e.! there is a favorable market for the clinic)! the physicians could reali/e a net profit of %1&&!&&&. "f the market is not favorable! they could lose %,&!&&&. f course! they don4t have to proceed at all! in which case there is no cost. "n the absence of any market data! the best the physicians can guess is that there is a 5&-5& chance the clinic will be successful. (onstruct a decision tree to help analy/e this problem. hat should the medical professionals do0 3-,& "n r 3-,& rob oble lem m 3-2 3-2! ! yo you u he help lped ed th the e me medi dica call pro profe fess ssio iona nals ls an analy aly/e /e th thei eir  r  decision using e$pected monetary value as the decision criterion. his group has also assessed their utility for money6 U( - %,5!&&&) 7 &! U( -%,&!&&&) 7 &.1! U( %5!& %5 !&&& &&)) 7 &. &.8! 8! U( &.*! U($ &.** **!! an and d U($1 U($O $O)) 7 &.* U($95, 95,00 000) 0) 7 &. U($100,0 00,000) 00) 7 1. 9se e$pected utility as the decision criterion! and determine the best decision for the medic me dical al pro profe fessi ssiona onals ls.. Are th the e me medi dica call pr prof ofes essi sion onal als s ri risk sk see seeke kers rs or ri risk sk avoiders0 3-,2 "n the past few years! the traffic problems in :ynn ;ctreet is congested about half the time. he normal

travel time to work for :ynn is only 15 minutes when =road >treet is used and there is no congestion. ith congestion! however! it takes :ynn ,& minutes to get to work. "f :ynn decides to take the e$pressway! it will take 3& minutes regardless of the traffic conditions. :ynn4s utility for travel time is: U(l5 minutes) 7 &.*! U(30  minutes) 7 &.8! and U(40 minutes) 7 &.2. 'a) hich route will minimi/e :ynn4s e$pected travel time0 'b) hich route will ma$imi/e :ynn4s utility0 'c) hen it comes to travel time! is :ynn a risk seeker or a risk avoider0