MBA Students Dilemma

1
MBA Students Dilemma

• For Managerial Economics Prof. Joshua Gans has
  provided the students with additional problems
  and online materials, above and beyond the
  required problems and reading, which they can
  chose to use improve there understanding of the
  subject.
• The choice the Students have is whether to use
  their valuable resource of time, to do the extra
  study or to do no extra study
• There are 3 possible outcomes for both options 1)
  Pass with an H1, 2) Pass but not an H1, 3) Fail

2
Decision Tree
Pass with H1
Pass but not an H1
Extra Study
Fail
Pass with H1
No Extra Study
Pass but not an H1
Fail
3
Relative costs/benefits in Monetary Terms

• Extra Study - 3hrs per week for 13 weeks about
  40hrs - assume cost of time is 50 per hour
  2,000
• Pass with an H1 benefit from future increase in
  annual salary 5,000
• Pass but not an H1 neutral relative cost
• Fail cost to repeat course _at_ 9 hrs per week for
  13 weeks (about 120hrs) _at_ 50 per hour 6,000

4
Probability of Outcomes

• Required Study but No Extra Study
• Pass with an H1 5
• Pass but not an H1 85
• Fail 10
• Required Study plus Extra Study
• Pass with an H1 20
• Pass but not an H1 75
• Fail 5

5
Expected Value of Outcomes

• Required Study but No Extra study - expected
  value
• 0.05(5000) 0.85(0) 0.10(-6000)
• 250 - 0 600
• -350
• Required Study plus Extra study expected value
• 0.20(5000-2000) 0.75(-2000)
  0.05(-6000-2000)
• 600 1500 400
• -1300

6
Conclusion

• Do the Required Study but No Extra study !
• If you agree with the relative costs / benefits ?
• If you agree with the probabilities of the
  outcomes ?

7
What happens if you add 3000 for the cost of
additional fees for failing

• Required Study but No Extra study - expected
  value
• 0.05(5000) 0.85(0) 0.10(-9000)
• 250 - 0 900
• -650
• Required Study plus Extra study expected value
• 0.20(5000-2000) 0.75(-2000)
  0.05(-9000-2000)
• 600 1500 550
• -1450
• Same Conclusion

8
What is the breakeven probability of an H1 to
make extra study worthwhile ?

• Required Study plus Extra study breakeven when
  expected value -650 and y of getting an H1
  (Assume fail probability stays equal)
• -650 y(5000-2000) (0.95-y)(-2000)
  0.05(-9000-2000)
• Resolve y
• -650 3000y - 1900 2000y 550
• 5000y 1800
• y 0.36 or 36