The business manager decides to access the latest macroeconomic predictions from the Bank of England. This provides him with the following probabilities: Recession (15%), Low Growth (30%), Medium Growth (35%), and High Growth (20%). Which option is preferred according to the expected monetary value (EMV) criterion? What attitude to risk does this represent? The business manager of Tolkien Transport wishes to analyse three strategic optionsavailable to the company (Cost-cutting; Diversification; Expansion) under four possibleUK macroeconomic conditions: Recession, Low Growth, Medium Growth and HighGrowth. He has summarised available information in the following pay-off matrix (withimpact on company profits in the next year in £000s).Macroeconomic ConditionsMedium GrowthRecession Low GrowthHigh GrowthCost-CuttingDiversificationExpansion100130170200-12050240300-25030300500

In risk management and decision-making, expected monetary value is a key idea. It entails…

Answered: The business manager of Tolkien…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The business manager decides to access the latest macroeconomic predictions from the Bank of England. This provides him with the following probabilities: Recession (15%), Low Growth (30%), Medium Growth (35%), and High Growth (20%). Which option is preferred according to the expected monetary value (EMV) criterion? What attitude to risk does this represent?

The business manager of Tolkien Transport wishes to analyse three strategic options
available to the company (Cost-cutting; Diversification; Expansion) under four possible
UK macroeconomic conditions: Recession, Low Growth, Medium Growth and High
Growth. He has summarised available information in the following pay-off matrix (with
impact on company profits in the next year in £000s).
Macroeconomic Conditions
Medium Growth
Recession Low Growth
High Growth
Cost-Cutting
Diversification
Expansion
100
130
170
200
-120
50
240
300
-250
30
300
500

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