Part 1

Chad operated an automobile sales business. A major dealer in town offered Chad a one-time opportunity to help them sell some “trade-ins.” Under this deal (see table in the attached file), Chad could take one used car at a time from the dealer and try to sell it. If he sold it, he could take another. There were three cars they wanted Chad to try to sell.

The Dealer concluded the offer as follows:“Chad, we have not dealt with you before so we plan to proceed cautiously: I’m sure you understand. If you accept this deal, you must take the compact first. If you sell the compact, then you can choose either of the other two, or you can end the deal. If you sell the second car, then you can take the third if you wish.”

CarChad’s Commission(On sale)Chad’s Selling CostChad’s Estimate of Probability of SaleCompact$900$6003/4Standard$1,500$2002/3Luxury$3,000$60050/50

Question 1 (10 points)

Question 1 options:Chad’s expected return on selling the Compact car is.

Question 2 (10 points)

Question 2 options:Chad’s expected profit from selling the Compact car is.

Question 3 (10 points)

Question 3 options:Chad’s expected return from selling the Standard car is.

Question 4 (10 points)

Chad should take this offer because his expected return is positive.Question 4 options:TrueFalse

Question 5 (10 points)

SavedAfter selling the first Compact car, Chad should choose to sell the __________ car first.Question 5 options:StandardLuxury

Carlie needed a personal computer (PC) for school but her budget was tight, so she decided on a used machine. After some searching, she was down to two possibilities. One she had found in a national franchized computer store, where she could purchase the PC for $800 with a one-year guarantee. But she was intrigued by a second possibility: a local charity store was offering a used machine that had been donated (exactly the same model as in the store) for $500.

Carlie talked to a computer repair specialist, who said the principal problem with this model of PC was the hard drive, which was prone to failure: he estimated that half of the PCs of this model and age would require a new drive. He offered to test the computer and check the condition of the drive for $60. If the drive was no good, a new drive could be fitted for $300 and would be guaranteed for one year. He added a qualification that his testing was not perfect: about 25% of drives that passed his testing failed soon afterwards requiring a new drive ($300) plus a service charge of $100 for diagnosing the problem (a cost that has to be paid with the fitting of a new drive).

Question 6 (10 points)

Question 6 options:The expected cost of buying the second hand computer from charity is

Question 7 (10 points)

SavedCarlie would be better off to buy the computer with a one-year guarantee for $800.Question 7 options:TrueFalse

Question 8 (10 points)

Question 8 options:Carlie would expect to save $with the test before purchase.

Question 9 (10 points)

Question 9 options:If the second hand computer passes the test, then its expected cost is $.

Question 10 (10 points)

Carlie shouldQuestion 10 options:buy the second hand computer only if it passes the test.buy the second hand computer without taking the test.still buy the second hand computer even if it fails the test.