Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by factor of over 100. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition.
His alternatives are as follows:
Equipment Favorable Market Unfavorable Market ($)
Sub 100 $300,000.00 $-200,000.00
Oiler J $250,000.00 $-100,000.00
Texan $ 75,000.00 $ -18,000.00
The Lubricant is an expensive oil newsletter to which many oil giants subscribe, including Ken Brown. In the last issue, the letter described how the demand for oil products would be extremely high.
Apparently the American consumer will continue to use oil products even if the price of these products doubles. Indeed, one of the articles in the Lubricant states that the chances of a favorable market for oil products was 70%, while the chance of an unfavorable market was only 30%. Ken would like to use these probabilities in determining the best decision.
e) What decision model should be used?
What is the optimal decision?
f) What is the maximum amount that should be paid for a perfect forecast of the economy
g) Develop an opportunity loss table.
What is the minimax regret decision?
h) What approach would Ken use to minimize expected opportunity loss.
What is the expected opportunity loss decision?
i) Considering all the decisions calculated above, what do you think Ken should do?