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b) Problems: 8, 10, and spreadsheet problem 1.
Discussion Question 12: What is the rationale behind the
minimax regret rule? What are some of the less formal and
precise methods of dealing with uncertainty? When are these
useful?
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?
Spreadsheet Problem 1: An individual has to choose between
investment A and investment B. The individual estimates
that the income and probability of the income from each
investment are as given in the following table.
Investment A
Investment B
Income
Probability
Income
Probability
4,000
0.2
4,000