Explore BrainMass
Share

Explore BrainMass

    Expected profit, mean-variance, maximin, maximax

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    A firm making production plans believes there is a 30% probability the price will be $10, a 50% probability the price will be $15%, and a 20% probability the price will be $20. The manager must decide whether to produce 6000 units of output (A), 8000 units (B) or 10000 units (C). The following table shows 9 possible outcomes depending on the output chosen and the actual price.

    Profit (loss)when price is
    $10 $15 $20

    6,000 (A) ($200) $400 $1,000
    Production 8,000 (B) ($400) $600 $1,600
    10,000 (C) ($1,000) $800 $3,000

    11. What is the expected profit if 6000 units are produced?

    a. $171
    b. $840
    c. $640
    d. $340
    e. $260

    12. What is the expected profit if 10,000 units are produced?
    a. $500
    b. $700
    c. $625
    d. $1000
    e. $1754

    13. If the mean-variance rule is used, how much should the firm produce?
    a. 6,000
    b. 8,000
    c. 10,000
    d. can't use this rule to make the decision

    14. What is the variance if 6,000 units are produced?
    a. 490,000
    b. 176,400
    c. 100,000
    d. 68,200
    e. 76,460

    15. For the above payoff matrix, suppose the manager has no idea about the probability of any of the three prices occuring. If the maximax rule is used how much will the firm produce?
    a. 6,000
    b. 8,000
    c. 10,000
    d. can't use this rule to make the decision.

    16. For the above payoff matrix, suppose the manager has no idea about the probability of any of the three prices occuring. If the maximin rule is used how much will the firm produce?
    a. 6,000
    b. 8,000
    c. 10,000
    d. can't use this rule to make the decision

    © BrainMass Inc. brainmass.com October 9, 2019, 5:13 pm ad1c9bdddf
    https://brainmass.com/economics/preferences-choice/expected-profit-mean-variance-maximin-maximax-51226

    Solution Preview

    See attached file

    A firm making production plans believes there is a 30% probability the price will be $10, a 50% probability the price will be $15%, and a 20% probability the price will be $20.  The manager must decide whether to produce 6000 units of output (A), 8000 units (B) or 10000 units (C). The following table shows 9 possible outcomes depending on the output chosen and the actual price.

    Profit (loss)when price is
    $10 $15 $20

    6,000 (A) ($200) $400 $1,000
    Production 8,000 (B) ($400) $600 $1,600
    10,000 (C) ($1,000) $800 $3,000

    30% 50% 20%
    $10 $15 $20
    A $6,000 ($200) $400 $1,000
    B $8,000 ($400) $600 $1,600
    C $10,000 ($1,000) $800 $3,000

    11. What is the expected profit if 6000 units are produced?  

           a. $171
           b. $840
           c. $640
           d. $340
           e. $260

    Answer: $340
    You are right

    12. What is the expected profit if 10,000 units are produced?  ANSWER B
           a. $500
           b. $700
           c. $625
           d. $1000
           e. ...

    Solution Summary

    Answers to multiple choice questions on Expected profit, mean-variance, maximin, maximax.

    $2.19