Economics

Economics

Assignment
Assessment Task: Calculations and short answer questions
Submission Date
and Time: 28 May, 11:59pm
Value (Weight): 10% of total assessment
Word Length: Word length not applicable owing to the statistical
nature of the assignment.
Learning
Outcome(s): 1-4
Question 1
Faraway Inc. is considering a research and development project that will
cost $5 million. Profit projections appear promising, but Faraway’s CEO is
concerned because the probability that the R&D project will be successful
is 0.5. Furthermore, the CEO knows that even if the project is successful it
will require the company to build a new production facility at a cost of $20
million in order to manufacture the product. If the facility is built,
uncertainty remains about the demand and therefore the profit that will be
realised. The expected revenues and probabilities associated with possible
demand levels are as follows:
Demand Probability Revenue
($ million)
High 0.5 59
Medium 0.3 45
Low 0.2 35
Another option is that, if the R&D project is successful, the company could
sell the rights to the product for $25 million; under this option, the
company would not need to build the production facility.
Complete the following tasks:
a) Design a decision tree for this problem.
b) Solve the tree and make a recommendation to the CEO of Faraway.
c) Would your answer change if the probability of high demand
decreased to 0.2 and the probability of low demand increased to 0.5?
Explain.
Question 2
Two telecommunications companies, Teltus and Opstra, compete with
each other for market share. In planning marketing strategy for the coming
year each company will select one of three strategies designed to gain
market share. The three strategies are as follows:
A) Increase advertising
B) Provide quantity discounts
C) Reduce contract-length requirements
The payoff table for Teltus (in terms of percentage changes in market
share) is:
Teltus Strategy Opstra strategy
A B C
A 4 3 2
B -1 4 1
C 5 -2 5
Determine the following (explain how you arrived at each
result):
a) The optimal strategy for Teltus.
b) The optimal strategy for Optsra.
c) The value of the game.
Question 3
The Mixtech Company is going to introduce one of three possible new
products: a Getwid, a Humgun or a Notnim. The market conditions will
determine the profit or loss the company experiences as shown in the
following payoff table.
Market conditions
Favourable Stable Unfavourable
Probability 0.15 0.65 0.20
Getwid 120,000 70,000 -30,000
Humgun 60,000 40,000 20,000
Notnim 35,000 30,000 30,000
Complete the following tasks:
a) Determine the expected value for each decision and select the best one.
b) Develop an opportunity loss (regret) table and compute the expected
opportunity loss for each product.
c) Determine how much the firm would be willing to pay a market research
firm to gain better information about future market conditions.
Assessment Rubric:
Performance Indicators
Fail
Less than
50%
Pass
50% to 64%
Credit
65% to 74%
Distinction
75% to 84%
Formulation
and/or
selection of
models
Numerous
errors in the
models,
incorrect
model used
and/or
missing
variable
descriptions
Some errors
in the models
or equation
specifications
and/or several
missing
variable
descriptions
A good level
understanding
of the
question with
a description
missing for
two variables
A very high
level
understanding
of the
question with
a description
missing for
one variable
Correctly
solved
problems
Incorrectly
solved model,
wrong Excel
QM module
used when
solving
problem, or
wrong
equation used
The solved
problem has
several errors
present and is
difficult to
follow
The solution
to the
problems
provided are
mostly correct
but there is at
least one
major error
(or two minor
errors)
Answers
demonstrate a
high level of
understanding
in the process
of solving the
problems but
a minor error
is present
Explanation
of solved
answers
Inaccurately
communicates
the solution to
the problems
and the
relevant
concepts
Limited
explanation of
the solution to
the problem
and limited
demonstrated
understanding
of the relevant
concepts
Satisfactorily
communicates
an
understanding
of the solution
and the main
concepts
relevant to the
question and
the computed
results
A high level of
understanding
of the key
concepts
relevant to the
question and
computed
results is
demonstrated
Presentation Assignment is
presented in a
manner that
is difficult to
follow and
lacks the
elements of a
professional
presented
assignment
Assignment is
difficult to
follow at
times and/or
lacks several
of the
attributes
required in a
professionally
presented
assignment
Assignment
has a logical
structure but
lacks several
of the
attributes
required for a
professionally
presented
assignment
Assignment is
presented in a
logical
manner but
lacks a few
minor
attributes of a
professionally
presented
assignment
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