Economics Assignment

QUESTIONS? CONTACT US! Rev. 7/10/2014 Engineering Professional Education | Seng -Liang Wang Hall | 516 Northwestern Avenue, Suite 2500 | West Lafayette, IN 47906 -3105 Ph: (765) 49 4-7015 | Toll Free (US Only): (877) 598 -4233 | Fax: (765) 49 4-6628 | Email: [email protected] | Website: www.proed.purdue.ed u ENGINEERING PROFESSIONAL EDUCATION - EXAM COVER SHEET EXAM INFO Exam Number: 1 Scheduled Exam Date : 03/08/2017 PROFESSOR (THE FOLLOWING MUST B E COMPLETED BY THE P ROFESSOR .) COURSE: IE 546 PROFESSOR NAME: Chris Quinn PROFESSOR'S PHONE: (765) 496 -0404 CONDITIONS (INDICATE ONE FOR EACH OF THE FOLLOWING ): 1. Closed Textbook , Open Textbook , Take -Home, Other ( Explain ): closed book 2. Notes Allowed: YES NO 3. Calculators Allowed: YES NO 4. Laptop Allowed: YES NO 5. Cell Phones are to be turned off: YES NO 6. Time Limit ( Number of Minutes and/or Hours) : 60 min 7. Other Specifications (crib sheets, special tables, references, etc.) none PROCTORS – Please remind students to write clearly, press firmly, not to write on the back -side or to the very edge of the page. EXAM PROCTOR (THE FOLLOWIN G MUST BE COMPLETED BY THE EXAM PROCTOR .) CERTIFICATION (CHECK THE FOLLOWING T O INDICATE YOUR AGRE EMENT ): I have read and understand the exam regulations. I have verified the identity of the student (s) by their govern ment issued ID. This examination has been administered in accordance with the specified regulations and conditions . This exam has been given on the date specified above, or… Prior arrangements have been made by student(s) with written approval of professor for different exam date. STUDENT NAME : EXAM SITE: DATE AND TIME (START & STOP) EXAM ADMINISTERED : SIGNATURE & PRINTED NAME OF PROCTOR : PROCTOR PHONE & EMAIL : EXAM PROCTOR COMMENTS TO PROED OR PROFESSOR : **IMPORTANT EXAM RETURN INSTRUCTIONS**  Scan the completed cover sheet and entire exam into a single PDF file (include ALL n umbered pages as well a s crib sheets if requested in #7 above ). Immediately save the file and uploa d it to the secure exam portal.  If unable to scan and upload, contact ProEd for alternate exam return arrangements.  Retain the completed exam origina l unt il the end of the semester, then shred. Industrial Engineering 546 Spring 2017 Economic Decisions in Engineering Exam 1 Student Information (print neatly) Name: Purdue email:

Directions:

You have 60 minutes to complete this exam. If you open the test before stated or do not turn it in on time you will lose 20 points.

This exam is closed book and notes. You will receive a zero for this exam for using books, notes, electronic devices (cell phone, ipad, calculator, laptop, etc.). You will also be reported and appropriate disciplinary action will be taken.

Your answers must be legible. Circle, underline, or leave su cient white-space to distinguish your answers from intermediate work.

Show all your work.

Grade:1.[30] 2.[20] 3.[50] Total:

1 Problem 1.

[30 points] Consider the following decision tree. There are two parameters, pand Q, which are not known precisely. low base high p 10% 30% 50% Q 25k 30k 40k Conduct sensitivity analysis. First, determine the expected earnings as a function of the variables pand Q:

E earnings of A = E earnings of B = E earnings of C = Second, determine the expected earnings using the base-case values for pand Q:

E earnings of A = E earnings of B = E earnings of C = 2 Draw the one-way sensitivity plots for pand Q. Label the curves. Draw the tornado diagrams for strategies Aand B. Label the axes. Draw the two-way sensitivity plot for pand Q. For each boundary denote which strategy is preferred and for each region denote the preferred strategy. 3 Problem 2.

[20 points] The following questions involve calculating how money changes value over time. You do not need to calculate the nal answer. You do need to simplify your answer so the quantity of interest is on the left hand side and all numbers are on the right.

For instance, if asked to nd a return rate r, your nal answer should look like \ r= : : : " Recall the formula F V=P V (1 + r)n .

A.10 years ago, you invested $1000 in a savings account with 5% yearly compounded interest. In ation has been stable at 2%.

1.What is the current dollar amount of your investment?

2.What is the current purchasing power in 2007 dollars?

B.Your friend asks to borrow $10 ;000. He says he'll pay you back $5000 after ve years and $7500 after 10 years. Suppose in ation is 2%. What is the net present value of this deal?

4 C.You have $1000 to invest. In ation is 2%.

1.You invest in a savings account with 5% interest. How many years nof com- pounding will it take for the dollar amount to double?

2.What interest rate rshould you invest at so the purchasing power of your money will double after 25 years?

5 Problem 3.

[50 points]Show your work, even if you cannot nish the calculations.

Using the pro t matrix below (rows correspond to strategies fA ig and columns correspond to scenarios fS jg ), as well as the table of scenario probabilities, determine which strategy is preferred for each of the following criteria (if any): S 1 S 2 S 3 S 4 Probability (%): 20 40 30 10 S 1 S 2 S 3 S 4 A 1 10 50 50 30 A 2 40 30 70 40 A 3 20 20 40 60 A.Expected value B.Risk pro le dominance (label the curves) 6 S 1 S 2 S 3 S 4 A 1 10 50 50 30 A 2 40 30 70 40 A 3 20 20 40 60 C.Laplace D.Maximax E.Maximin 7 S 1 S 2 S 3 S 4 Probability (%): 20 40 30 10 S 1 S 2 S 3 S 4 A 1 10 50 50 30 A 2 40 30 70 40 A 3 20 20 40 60 S 1 S 2 S 3 S 4 A 1 A 2 A 3 F.Minimax regret G.Minimum expected regret 8 9