Questions for Critical Thinking 7- Busi 604 Liberty University

Salvatore's Chapter 14:

a. Discussion Questions: 12 and 15.

b. Problems: spreadsheet problems 1 and 2.

Note:

1. Spreadsheet problem 1: Use table 14-4 as reference.

2. Spreadsheet problem 2: Use tables 14-5 and 14-6 as reference.

Discussion Question 12: What is the rationale behind the minimax regret rule? What are some less formal and precise methods of dealing with uncertainty? When are these useful?

The rationale behind the minimax regret rule is to decrease the risk involved with business decisions and minimize the maximum regret or opportunity cost related from those decisions (Salvatore, 2011). The regret that is linked with the decision is determined by subtracting the payoff from the decision from the maximum payoff under the same state of nature (Salvatore, 2011). The strategy is chosen by the decision maker based on the minimum of the maximum regrets under any likely state of nature. Some less formal and precise methods of dealing with uncertainty are: the acquisition of additional information, referral to authorities such as the Internal Revenue Service and Securities and Exchange Commission to eliminate any uncertainty relating to their specific expertise, trying to manage the business environment for respective firms utilizing patents and copyrights, and diversifying the product line and security holdings that exist within the company’s portfolio (Salvatore, 2011). The minimax regret rule is useful during the time when decision makers need to minimize the maximum regret or opportunity cost related from their decisions in of any kind of nature that occurs state of nature occurs (Salvatore, 2011).

Discussion Question 15: How does the adverse selection problem arise in the credit-card market? How do credit-card companies reduce the adverse selection problem that they face? To what complaint does this give rise?

The adverse selection, also known as the negative selection refers to a market of undesired penalties occurring from...