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Suggested answers to selected questions 467
If this fails they should not lower prices (expected net present
value = $59.6 million, as opposed to $46.7 million for opening a
plant in Slohemia).
(b) The probability of nationalization would have to fall to below
0.14 (approx.) before Slohemia was worth considering.
(10) (a) The college should not conduct the market research and they
should launch the course. This yields expected profits of $28 000
as opposed to an expected loss of $670 if the research is conducted.
(11) The managers should carry out a conventional burn and, if there
are problems, they should apply additional resources (expected net
benefits = $5345 as opposed to $2780 for yarding).
(12) (a) The utility functions suggest risk aversion for both attributes.
(b) The railway should lower prices, but not use advertising
(expected multi-attribute utility = 0.9736 as opposed to 0.644
for retaining existing prices).
Chapter 7
(1) (a) Profit probability distribution is: $0: 0.08; $100: 0.20; $200: 0.24;
$300: 0.30; $400: 0.18.
(c) Probability distribution estimated from simulation is: $0: 0; $100:
0.20; $200: 0.30; $300: 0.30; $400: 0.20.
(3) (b) Assuming that the mean–standard deviation screening procedure
is valid, only designs 1, 2 and 6 lie on the efficient frontier.
Design 6 offers higher returns but also has a higher level of risk
than designs 1 and 2.
(5) (a) The option of replacing the plant with new equipment exhibits
first-degree stochastic dominance over the option of extending
the existing plant.
(b) Replacing the plant with new equipment also exhibits seconddegree
stochastic dominance over the option of moving the
company’s operations.
Chapter 8
(1) (i) p(high sales) = 0.7; p(low sales) = 0.3.
(ii) Posterior probabilities: p(high sales) = 0.4375; p(low sales) =
0.5625.
(2) p(sales exceed one million units) = 0.4615.