Miles is considering buying a new pickup truck for his lawn service firm. The ec
ID: 406554 • Letter: M
Question
Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.
States of Nature
Alternatives
Lower gas prices
Gas prices unchanged
Higher gas prices
Probability
.3
.5
.2
Subcompact
$16,000
$21,000
$23,000
Compact
$15,000
$20,000
$22,000
Full size
$18,000
$19,000
$6,000
Calculate the expected monetary value for full size
20 points
QUESTION 9
Miles is considering buying a new pickup truck for his lawn service firm. The economy in town seems to be growing, and he is wondering whether he should opt for a subcompact, compact, or full-size pickup truck. The smaller truck would have better fuel economy, but would sacrifice capacity and some durability. A friend at the Bureau of Economic Research told him that there is a 30% chance of lower gas prices in his area this year, a 20% chance of higher gas prices, and a 50% chance that gas prices will stay roughly unchanged. Based on this information, Miles has developed a decision table that indicates the profit amount he would end up with after a year for each combination of truck and gas prices.
States of Nature
Alternatives
Lower gas prices
Gas prices unchanged
Higher gas prices
Probability
.3
.5
.2
Subcompact
$16,000
$21,000
$23,000
Compact
$15,000
$20,000
$22,000
Full size
$18,000
$19,000
$6,000
Which option would you recommend for Miles?
Subcompact
Compact
Full size
There is no difference among the options
States of Nature
Alternatives
Lower gas prices
Gas prices unchanged
Higher gas prices
Probability
.3
.5
.2
Subcompact
$16,000
$21,000
$23,000
Compact
$15,000
$20,000
$22,000
Full size
$18,000
$19,000
$6,000
Explanation / Answer
Miles should go for subcompact as it has a higher EMV.
EMV for Subcompact 0.3*16000+0.5*21000+0.2*23000 = $19,900 EMV for Compact 0.3*15000+0.5*20000+0.2*22000 = $18,900 EMV for Full size 0.3*18000+0.5*19000+0.2*6000 = $16,100