Maximax Economics Assingment Help With Solution

Problem 1: A home construction company has three options for the size of a new development. They must decide whether to build 50, 100 or 150 homes. Their profit depends on the eventual demand for houses. For the purposes of analysis, they consider three possible future markets in three years when the homes are available. The demand could be Low (50 homes), Moderate (100) or High (150). They estimate their potential profit in the following table:

Payoff Matrix Alternatives: Number of homes to build State (Demand) 50 100 150 Low (50)
$400,000
$100,000
-$200,000 Moderate (100) $400,000 $800,000 $500,000 High (150)
$400,000
$800,000
$1,200,000

Suppose that they have no information about the probabilities of the demand (complete ignorance). What is the optimal decision using the rules: Maximax, Maximin, Laplace and Minimax Regret?

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Problem 2: The manager of a university bookstore is trying to determine whether or not to advance purchase copies of a popular textbook. Het uncertainty is caused by the changing popularity of the course that requires the book. The table on the right characterizes the uncertainties as well as the present values of her options.

The bookstore manager can pay $6,000 for a student survey that will predict whether the course’s popularity will go up or down. The second table indicates the results of past predictions using student surveys.
a. Draw the decision tree for this problem,
b. Determine whether or not the bookstore manager should advance purchase the textbook.

Problem 3: Spending $1,500 more today for a hybrid engine rather than a conventional gasoline engine will result in annual fuel savings of $300. How many years must these savings continue in order to justify the extra investment if money is worth 10% per year compounded monthly?

Problem 4: Investments on the stock market typically involve a trade off between the expected return and the risk (variance). Consider the following set of potential investments. Plot the efficient frontier for the options and identify which of the stocks could clearly be eliminated

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