3-21 Allen Young has always been proud of his personal investment strategies

and has done very well over the past several years. He invests primarily in the
stock market. ver the past several months! however! Allen has become very
concerned about the stock market as a good investment. "n some cases it would
have been better for Allen to have his money in a bank than in the market. #uring
the ne$t year! Allen must decide whether to invest %1&!&&& in the stock market or
in a certificate of deposit '(#) at an interest rate of *+. "f the market is good!
Allen believes that he could get a 1,+ return on his money. -ith a fair market!
he e$pects to get an .+ return. "f the market is bad! he will most likely get no
return at all-in other words! the return would be &+. Allen estimates that the
probability of a good market is &.,! the probability of a fair market is &.,! and the
probability of a bad market is &.2! and he wishes to ma$imi/e his long-run
average return.
'a) #evelop a decision table for this problem.
'b) -hat is the best decision0
3-22 "n 1roblem 3-21 you helped Allen Young determine the best investment
strategy. 2ow! Young is thinking about paying for a stock market newsletter. A
friend of Young said that these types of letters could predict very accurately
whether the market would be good! fair! or poor. 3hen! based on these
predictions! Allen could make better investment decisions.
'a) -hat is the most that Allen would be willing to pay for a newsletter0
'b) Young now believes that a good market will give a return of only "" + instead
of 1,+. -ill this information change the amount that Allen would be willing to pay
for the newsletter0 "f your answer is yes! determine the most that Allen would be
willing to pay! given this new information.
3-2. A group of medical professionals is considering the construction of a private
clinic. "f the medical demand is high 'i.e.! there is a favorable market for the
clinic)! the physicians could reali/e a net profit of %1&&!&&&. "f the market is not
favorable! they could lose %,&!&&&. f course! they don4t have to proceed at all!
in which case there is no cost. "n the absence of any market data! the best the
physicians can guess is that there is a 5&-5& chance the clinic will be successful.
(onstruct a decision tree to help analy/e this problem. -hat should the medical
professionals do0
3-,& "n 1roblem 3-2.! you helped the medical professionals analy/e their
decision using e$pected monetary value as the decision criterion. 3his group has
also assessed their utility for money6 U( - %,5!&&&) 7 &! U( -%,&!&&&) 7 &.1! U( -
%5!&&&) 7 &.8! U($O) 7 &.*! U($95,000) 7 &.**! and U($100,000) 7 1. 9se
e$pected utility as the decision criterion! and determine the best decision for the
medical professionals. Are the medical professionals risk seekers or risk
avoiders0
3-,2 "n the past few years! the traffic problems in :ynn ;c<ell4s hometown have
gotten worse. 2ow! =road >treet is congested about half the time. 3he normal
travel time to work for :ynn is only 15 minutes when =road >treet is used and
there is no congestion. -ith congestion! however! it takes :ynn ,& minutes to get
to work. "f :ynn decides to take the e$pressway! it will take 3& minutes regardless
of the traffic conditions. :ynn4s utility for travel time is: U(l5 minutes) 7 &.*! U(30
minutes) 7 &.8! and U(40 minutes) 7 &.2.
'a) -hich route will minimi/e :ynn4s e$pected travel time0
'b) -hich route will ma$imi/e :ynn4s utility0
'c) -hen it comes to travel time! is :ynn a risk seeker or a risk avoider0