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3 investment choices
Payoffs
Problem 1. Brown Oil, Inc. (cont.)
$300,000
Decision Tree
Payoff table
-$200,000
$250,000
Oiler J
-$100,000
$75,000
-$100,000
$75,000
-$18,000
Problem 1. Brown Oil, Inc. (cont.)
Maximin: maximize the minimum $300,000
(1) Find minimum of each option
(2) From these, choose maximum
-$200,000
$250,000
Oiler J
$100,000
Medium-sized shop Average (0.5) $35,000 EMV = 0.2(100,000) + 0.5(35,000) + 0.3(-60,000) = $19,500
-$60,000
Maximum EMV:
$0 Thus we build
Average (0.5) $0
EMV = 0.2(0) + 0.5(0) + 0.3(0) = $0 the medium-
sized shop!
$0
Problem 3. How many classes to take?
Below is a probability distribution on the number of classes, , you will decide to
take next semester. Find and .
= 3 4 5
( = ) 0.10 0.70 0.20
How to solve this?
= = ( = )
2 = = 2
= 2 ( = )
At this point you might be thinking
Problem 3. How many classes to take (cont.)?
Distribution: from Latin distribuere (deal out in portions)
You encounter distributions all the time, and we often have to figure out
the center part and variation in the distribution
=
How many classes?
(what we have to deal out)
What probability?
(our specific portions)
= = .
Whats your guess for the center part (mean) of the distribution? Whats your
guess for how the distribution is spread out (standard deviation)?
Problem 3. How many classes to take (cont.)?
My (real) guesses: 0.40 for the standard deviation and about 4.40 for the mean
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
3 4 5
Warning: Graphs are often extremely
useful, but they can be very deceiving
if not drawn to scale! The main point SD = Mean =
here is to de-mystify what were 0.40? 4.40?
calculating and why.
Problem 3. How many classes to take (cont.)?
Below is a probability distribution on the number of classes, , you will decide to take next
semester. Find and .
= 3 4 5
( = ) 0.10 0.70 0.20
How to solve this?
= = = = 3 0.1 + 4 0.7 + 5 0.2 = .
2 = = 2 = 2 = = 3 4.1 2
0.1 + (4
Problem 4. Rain in September
In September in Cambridge, MA, each day has a 30% chance of being
rainy (consider rainy to be any type of precipitation throughout this
problem). Also, if it rains one day, it has no effect on whether it will
rain any other day. What is the probability of 1 or fewer rainy days
over the course of one week (7 days) in September in Cambridge?
p = success = rainy day = 0.30
q = failure = non-rainy day = 1 0.30 = 0.70
x = number of successes in the sample (so x = 1)
n = number of trials (sample size) = 7
Number of ways to
have x successes
in n trials
Rain in September (cont.) Probability of n - x failures
Binomial !
Distribution = = ()
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