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BUSI 620 MODULE 7 QUESTIONS FOR CRITICAL THINKING 7

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Questions for Critical Thinking 7
Salvatore Chapter 14:
a. Discussion Questions: 12 and 15.
Question 12: What is the rationale behind the minimax regret rule? What re some less formal and precise methods of dealing with ncertainty? When are these useful?
Question 15: How does the adverse selection problem arise in the credit card market? Ho do credit card companies reduce the adverse selection problem that they face? To what complaint does this give rise
b. Problems: spreadsheet problems 1 and 2.
Problem 1: An investor has two investment opportunities., each involving an outlay of \$10,000. The present value of possible outcomes and their perspective probabilities are.

Investment I

Investment II

Outcome

\$4,000

\$6,000

\$3,000     \$5,000   \$7,000

Probability

0.6

0.4

0.4             0.3           0.3

(a)   Calculate the expected value of each investment.
(b)  Draw a bar chart for each investment.
(c)   Calculate the standard deviation of each project.
(d)  Determine which of the two investments the investor should choose.

Problem 2: Using Table C-1 in the Ecel attachment above for the standard normal distribution. (a) that 68.26 percent of the area under the standard nrmal curve is found wihinplus or minus 1 standard deviation of the mean, 95.44 percent within+/- 2a, and 99.74 percent within +/- 3a (b)the probability that profit will fall between \$500 and \$650 for project A in Section 14-2 of the text (with expected value of \$500 and standard deviation \$ 70.71); (c) the probability that profit for project A will fall between \$300 and \$650, below \$300, and above \$650.
Note:
1. Spreadsheet problem 1: Use table 14-4 as reference.
2. Spreadsheet problem 2: Use tables 14-5 and 14-6 as reference.
Froeb et al. Chapter 17:
a.     Individual problems: 17–1 and 17–4.
17-1: You are the manager for of global opportunities for a U.S. manufacturer, who is considering expanding to Asia.   Your market research has identified the market potential in Mylasyia, Philippines, and Signapore as described as next. The product sells for \$10 and has a unit cost of \$8.  If you can enter only one market, and the cost of entering the market (regardless of which market you select) is \$250,000, should you enter one of these markets? If so, which one? If you enter, what is your expected profit?

Success Level

Big

Mediocore

Failure

Mylaysia

Probability

0.3

0.3

0.4

Units

1,200,000

600,000

0

Philippines

Probability

0.3

0.5

0.2

Units

1,000,000

320,000

0

Signapore

Probability

0.7

0.2

0.1

Units

700,000

400,000

0

(more)
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