Problems

3-17 Kenneth Brown is the principal owner of Brown Oil,

Inc. After quitting his university teaching job, Ken

has been able to increase his annual salary by a fac-

tor of over 100. At the present time, Ken is forced

to consider purchasing some more equipment for

Brown Oil because of competition. His alternatives

are shown in the following table:

EQUIPMENT

Sub 100

Oiler J

Texan

FAVORABLE UNFAVORABLE

MARKET

MARKET

($)

($)

300,000

-200,000

250,000

-100,000

75,000

-18,000

For example, if Ken purchases a Sub 100 and if

there is a favorable market, he will realize a profit of

$300,000. On the other hand, if the market is unfa-

vorable, Ken will suffer a loss of $200,000. But Ken

has always been a very optimistic decision maker.

(a) What type of decision is Ken facing?

(b) What decision criterion should he use?

(c) What alternative is best?

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