Decision Making under Uncertainty

This assignment presents a business scenario where Remox, a company, must decide between two options with varying returns and risks depending on the implementation of tariffs. The analysis delves into applying different decision-making rules like Maximax, Maximin, Minimax Regret, and Equal Probability to help Remox choose the optimal strategy when facing uncertainty about the tariff probability.

Running Head: MANAGERIAL ECONOMICS 1
MANAGERIAL ECONOMICS
Students Name
University of Affiliation

MANAGERIAL ECONOMICS 2
1. Plot a scatter diagram of TVC on the vertical axis and Q on the horizontal axis.
Does the scatter diagram suggest a functional form for TVC? Explain briefly.
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f(x) = 41.1218682730502 x − 4312.17895368179
R² = 0.976275076350626
TVS vs QUANTITY
TVS vs QUANTITY
Linear (TVS vs QUANTITY)

MANAGERIAL ECONOMICS 3
The diagram represents a scatter diagram explaining the relationship between the independent
variable (production unit per month) and the dependent variable (total variable cost).The quantity
of production per month illustrates the behavior of the variable cost per month. The form that the
data takes is a cluster form of relationship. Data clusters are observed in the diagram, and a
straight line can be drawn with very few points. The graphs represent a weaker strength of
correlation between the explanatory and the responsive variables. That means for a particular
month; one cannot predict the total variable cost based on the production unit of the finished
product. The direction of the diagram is drifting upwards displaying a positive relationship.
The functional form is y=41.122x-4312.2
2. Plot a scatter diagram of AVC on the vertical axis and Q on the horizontal axis.
Does the scatter diagram suggest a functional form for AVC? Explain briefly
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f(x) = 0.00700855542054485 x + 28.3982435855191
R² = 0.672867433594354
AVC vs QUANTITY
The scatter diagram suggest a functional form of y=0.007x+28.398.

MANAGERIAL ECONOMICS 4
The graph represents the relationship between the quantity (independent variable) and the
average variable cost (dependent variable).The figure seeks to explain the correlation
between the units of finished product produced per month and the average variable price.
What impact does quantity produced have on average variable cost? The graph displays a
cluster form. The Linear line can be drawn on very few points leaving out the majority of
the points. The direction of the graph is drifting upwards showing a positive correlation.
The graph shows a weaker relationship. That is the quantity produced per month cannot
predict the average variable cost. There are outliners in the graph .for example; the
amount produced on December had highest average variable cost unlike the increase in
quantity produced in July which had low average variable cost.
b. Estimate a quadratic AVC function.
Present the estimated equation and evaluate the regression results (i.e., discuss
the algebraic signs of the parameter estimates, the significance levels, and the R2).
Quadratic AVC function
(x=369=0) (x=330)
(x+369)(x+330)=0
X²+330x+369x+121770
X²+699x+121770=0
=x²+699x+121770
AVC=Q²+699Q+121770

MANAGERIAL ECONOMICS 5
R² is 0.6729% it means that 67,29 % of the variation has been determined by
regression line and 32.71% is determined by other factors.
e. Evaluate the results of your regression equation in part a. Specifically discuss
algebraic signs of parameters, statistical significance, and goodness of fit.
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f(x) = 4338.06441786881 x − 120439.970567988
R² = 0.793133027748079
TVC vs AVC
TVC vs AVC
Linear (TVC vs AVC)
The plotted to scatter diagram is the total variable cost and average variable cost. This seems to
show the relationship between average cost which is the independent variable and the total
variable cost which Is the dependent variable.
Regression equation
(x=31.21)(x=41.33)
X²+41.33x+31.21x+1286.189=0
X²+72.54x+1286.189=0

MANAGERIAL ECONOMICS 6
2. a. How many chips should be produced (monthly) if world chip prices are $58 per
chip? Forecast the HSE’s profit at this output level.
Y=0.007x+28.39
58=0.007x+28.39
58-28.39=0.007x
29.61/0.007=4230
4230 chips should be produced
b. How many chips should be produced (monthly) if world chip prices are $32 per
chip? Forecast the profit at this output level.
Y=0.007x+28.39
32=0.007+28.39
32-28.39=0.007x
3.61/0.007=515.714
515.714 chips should be produced.
3. At what price should Harding shut down and produce no chips in the short run?
Y=0.007x+28.39
28.39=0.007x+28.39
28.39-28.39=0.007x
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MANAGERIAL ECONOMICS 7
At price of 28.39 or below of a chip, the Harding enterprise should close down as it will be
making no production.
REMOX
a.Compute the expected profits for both options.
Option A=
0.7*1,200,000=$840000
0.3*800,000=$240000
$840000+$240000=$1080000
Option B=
0.7*875,000=$612000
0.3*1,000,000=$300000
$612000+$300000=$912500
b.Based on the expected profit only, which option should Remox choose?
Remox should choose option A because it yields to high profit. The core reason for
running a business is so at to achieve set objectives and goals for the company. Among
the targets is to maintain high profit at all season and incur minimum loses.
c.Compute the probabilities that would make Remox indifferent between options A and
B using that rule.
Assuming the probability that tariif will pass be p
Option A expected profit=
(1-p)* 1,200,000+p*800,000=$1200,000-1200,000p+800,000p=

MANAGERIAL ECONOMICS 8
$1200,000=1200,000p-800,000p
$1200000/400000=400000/400000p
3=p
Option B expected profit=
(1-p)* $875,000+p*$1,000,000=$875000-875000p+1000000p=
$875000=1000000p-875000p
$875000/125000=125000/125000
7=P
Suppose the probabilities were the same then Remox would be different.
a) Compute the standard deviations for options A and B facing Remox Corporation.
Stndard deviation
√ ∑ ( x−Ẋ ) 2 /¿1)
Option A
(2,000,000-100000)²/(2-1)=1000000
Option B
(1875000-937500)²/(2-1)=937500
b) What decision would Remox make using the mean-variance rule?
The mean variance rule seeks to weight the expected return against its variance risk.
Remox would take the business with lower mean variance which is option B

MANAGERIAL ECONOMICS 9
c) What decision would Remox make using the coefficient of variation rule?
Coefficient variation =standard variation/expected return
Option A=1000000/1080000
=0.925
Option B=937500/912500
=1.027
The remox would want select the option with high return and low risk volatility. Option
A has high return and low risk volatility.
1. Using the information above, what decision would Remox make using each of the
following rules if it had no idea of the probability of a tariff?
a. Maximax.
The maximax includes a selection of various methods that maximizes the profit return.
Remox would select option B with hope to have the best return in whatever action will be
taken. This criterion is majorly used by risk takers.
b. Maximin
The maximin criterion looks at options that allow the business to have a minimum
payoff. Remox would select option A as it minimizes the loses .the business will look at
obtaining the highest possible results.
c. Minimax- regret

MANAGERIAL ECONOMICS 10
This criterion is useful for peril neutral assessment makers. Remox would select option b
since with inclusion of tariffs the company gets minimum profit but higher profit with no
tariffs inclusion.
d. Equal probability criterion
Under this criterion, the business looks at the average earnings for both options. Option A
has the highest average of $1000000 while option B has an average of 937500.Remox
will decide on selecting option A since it has the highest return

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https://en.wikipedia.org/wiki/Statistical_significance
Study 1: Wood Supply And Pricing Trends: 2000-2014. (2017). Theusipa.org. Retrieved
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Relation of Average Variable Cost and Average Total Cost to Marginal Cost -
Schedule/Table - Average Variable Cost and Marginal Cost - Diagram/Figure -
Economicsconcepts.com. (2017). Economicsconcepts.com. Retrieved 9 November
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age_total_cost_to_marginal_cost.htm
Ross, S. (2017). What are some of the uses of the coefficient of variation (COV)?.
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coefficient-variation-cov.asp