Napoleon is contemplating four institutions of higher learning as options for a Masters in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars.
$$\begin{array} { | l | c | c | c | }
\hline \text { School } & \text { Scenario 1 } & \text { Scenario 2 } & \text { Scenario 3 } \
\hline \text { Vanderbilt } & 95 & 20 & - 10 \
\hline \text { Texas Tech } & 55 & 60 & 60 \
\hline \text { Seattle } & 90 & 10 & 80 \
\hline \text { Northeastern State } & 65 & 50 & 60 \
\hline
\end{array}$$
-Suppose that the likelihood for each of the scenarios 1 through 3 is 0.3, 0.4, and 0.3, respectively. What is the optimal decision under the expected opportunity loss criterion?
A) Vanderbilt University
B) Texas Tech University
C) Seattle University
D) Northeastern State University

Question

Napoleon is contemplating four institutions of higher learning as options for a Masters in Business Administration. Each university has strong and weak points and the demand for MBA graduates is uncertain. The availability of jobs, student loans, and financial support will have a significant impact on Napoleon's ultimate decision. Vanderbilt and Seattle University have comparatively high tuition, which would necessitate Napoleon take out student loans resulting in possibly substantial student loan debt. In a tight market, degrees with that cachet might spell the difference between a hefty paycheck and a piddling unemployment check. Northeastern State University and Texas Tech University hold the advantage of comparatively low tuition but a more regional appeal in a tight job market. Napoleon gathers his advisory council of Kip and Pedro to assist with the decision. Together they forecast three possible scenarios for the job market and institutional success and predict annual cash flows associated with an MBA from each institution. All cash flows in the table are in thousands of dollars.
 $$\begin{array} { | l | c | c | c | } 
\hline \text { School } & \text { Scenario 1 } & \text { Scenario 2 } & \text { Scenario 3 } \
\hline \text { Vanderbilt } & 95 & 20 & - 10 \
\hline \text { Texas Tech } & 55 & 60 & 60 \
\hline \text { Seattle } & 90 & 10 & 80 \
\hline \text { Northeastern State } & 65 & 50 & 60 \
\hline
\end{array}$$
-Suppose that the likelihood for each of the scenarios 1 through 3 is 0.3, 0.4, and 0.3, respectively. What is the optimal decision under the expected opportunity loss criterion?
A) Vanderbilt University
B) Texas Tech University
C) Seattle University
D) Northeastern State University

Quizplus · Accepted Answer

Under the expected opportunity loss criterion, we calculate the expected loss for each option by multiplying each scenario's likelihood by the opportunity loss for that scenario and then adding up the results.

For option A (Vanderbilt University): 
Expected loss = (0.3 x $20,000) + (0.4 x $30,000) + (0.3 x $40,000) = $31,000

For option B (Texas Tech University): 
Expected loss = (0.3 x $10,000) + (0.4 x $0) + (0.3 x $20,000) = $7,000

For option C (Seattle University): 
Expected loss = (0.3 x $30,000) + (0.4 x $20,000) + (0.3 x $10,000) = $21,000

For option D (Northeastern State University): 
Expected loss = (0.3 x $40,000) + (0.4 x $50,000) + (0.3 x $0) = $34,000

Based on these calculations, it is clear that option B (Texas Tech University) has the lowest expected loss and is therefore the optimal decision.

Napoleon Is Contemplating Four Institutions of Higher Learning as Options