Question 1

1) Ken Brown is the principle owner of Brown Oil, Inc. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition (Table 1 illustrates these alternatives). The lubricant is an expensive oil newsletter to which many oil giants subscribe, including Ken Brown. In the last issue, the letter described how the demand for the 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 70%, while the chance of an unfavorable market was only 30%. 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?

C. Ken believes that the $300,000 figure for the Sub 100 with a favorable market is too high. How much lower would this figure have to be for Ken to change his decision made in part b?

D. Texan Co. proposes a new alternative to Ken that by advertisement for Brown Oil they would increase the chance of a favorable market to 90%; while the cost incurred on Ken’s firm under unfavorable market will be $60,000 in this case. Should Ken change his decision from part c?