Question

Question #2 - The Lubricant is an expensive oil newsletter to which many oil giants subscribe, including Ken Brown (see the above table). 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 75%, while the chance of an unfavorable market was only 25%. Ken would like to use these probabilities in determining the best decision. a. What decision model should be used? b. What is the optimal decision?

EQUIPMENT	FAVORABLE MARKET ($)	UNFAVORABLE MARKET ($)
Sub 100	325,000	−250,000
Oiler J	225,000	−100,000
Texan	70,000	−18,000

Answer 1

Given that pro babi ity fosAarorable market O75 probabelity for unfavorable matket O 25 Spcted Honehy rvered possible Mantmiae Ne ufe Value (ENV)kcause here are A cho ese Hha onHernatine State nature MV Awils (b EMV Subioo Laotttore (4325000) +(o-25)(-250 0 00) 243750 62500 Subee-f 18/250 EMVOdery -(075) * (225000) Coas) (-100,00) (-25000) 1687 50 + 0oase asER91 1437 50 EMV Tenan Co-75) 90,000) +(o 25) *(-It,poo) 52 500 48000 6

EMV 18 12 SD Subi00 Oiler B143 F50 48000 Telan Sub 100 haithe Kiyhet Syected Monckiy EMV