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CMA Intermediate · Management Accounting · Decision Theory

A firm has three states with probabilities S1 0.5, S2 0.3 and S3 0.2. Payoffs in ₹ thousand for acts X, Y and Z are: X: 60, 40, 20; Y: 50, 70, 30; Z: 40, 50, 90. What is the minimum expected opportunity loss (EOL) in ₹ thousand?

The minimum EOL is ₹16 thousand, for act Z. Opportunity losses are found by subtracting each payoff from the best payoff in its state, then weighting by probability. X gives 23, Y gives 17 and Z gives 16, so Z has the lowest expected regret.

  1. A16Correct
  2. B17
  3. C23
  4. D53

Explanation

Best payoff in each state is 60, 70 and 90. Regrets are X: 0, 30, 70; Y: 10, 0, 60; Z: 20, 20, 0. EOL of X = 0 + 9 + 14 = 23, of Y = 5 + 0 + 12 = 17, of Z = 10 + 6 + 0 = 16. The minimum is 16, for Z. The figure 17 is the EOL of Y, and 53 is the EMV of Z.

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