Management -Critical Thinking

Question 1

What is the rationale behind the minimax regret rule? What are some less formal and precise methods of dealing with uncertainty? When are these useful?

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Question 2

How does the adverse selection problem arise in the credit- card market? How do credit- card companies reduce the adverse selection problem that they face? To what complaint does this give rise?

Question 3

An individual has to choose between investment A and investment B. The individual estimates that the income and probability of the income from each investment are as given in the following table: Investment A Investment B Income Probability Income Probability 4000 0.2 4000 0.3 5000 0.3 6000 0.4 6000 0.3 8000 0.3 7000 0.2 (a) Using Excel’s statistical tools, calculate the standard deviation of the distribution of each investment. (b) Which of the two investments is more risky? (c) Which investment should the individual choose? NOTE: Use table 14-4 as reference

Question 4

An individual is considering two investment projects. Project A will return a zero profit if conditions are poor, a profit of \$ 4 if conditions are good, and a profit of \$ 8 if conditions are excellent. Project B will return a profit of \$ 2 if conditions are poor, a profit of \$ 3 if conditions are good, and a profit of \$ 4 if conditions are excellent. The probability distribution of conditions is as follows: