Suppose that the probability of low demand is 0.75. (a) What is the maximum Expected Monetary Value (EMV)? (show calculation steps) (b) What is the Expected Value of Perfect Information (EVPI)? Hint: EVPI=EVwPI-maximum EMV.
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Suppose that the probability of low
(a) What is the maximum Expected Monetary Value (EMV)? (show calculation steps)
(b) What is the Expected Value of Perfect Information (EVPI)? Hint: EVPI=EVwPI-maximum EMV.
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- Y = 30 - 25X + error What is the expected value of Y when X is 0? Y = 10 + 13.57*X + error By how much does the expected value of Y change if X increases by 18.02 units? (Round your answer to two decimal places: ex: 123.45)The following payoff table provides profits based on various posible decision alternativesand various levels of demand at Kmart Print Shop. Alternatives Low High Alternative 1 10,000 30,000 Alternative 2 5,000 40,000 Alternative 3 -2,000 50,000 The probability of low demand is 0.4, whereas the probability of high demand is 0.6.What is the highest possible expected monetary value?Exercise 3: Risky Investment Charlie has von Neumann-Morgenstern utility function u(x) = ln x and has wealth W = 250, 000. She is offered the opportunity to purchase a risky project for price P = 160, 000. 1 1 With probability p = 2 the project will be a success and return V > 160, 000. With probability 1 −p = 2 the project will fail and be worthless (i.e. it returns 0). For simplicity assume there is no interest between the time of the investment and the time of its return, that is r = 0 . How large must V be in order for Charlie to want to purchase the risky project? [Hint: What is Charlie’s expected utility is she does not purchase the project? What is Charlie’s expected utility is she purchases the project?]
- Assume you are faced with two decision alternatives and two states of nature whose profit payoff table is shown below. Decision Alternative State of Nature 1 State of Nature 2 Decision 1 25 30 Decision 2 45 15 The probability of state of nature 1 is 0.4.(a) Compute the expected value of each alternative.(b) Which decision is the optimal decision?(c) Compute the expected value with perfect information.(d) Compute the expected value of perfect information.Suppose that consumers have utility function U(C) = log(C) where C is the consumption level and log is the natural logarithm. Consumers have initial consumptionlevels of 100 and are exposed to the following risk of loss: lose 10 with probability0.4 and lose 5 with probability 0.6. They are considering buying insurance to coverthese losses. What is the fair price for the insurance?A company owns an asset that is worth $245,000 and there is a 6% chance that it will lose $185,000 in value, otherwise it will not change. If the company has an expected utility functions with u(x) = x0.5, then the expected utility for the company is 480 464 460 456
- You plan to invest $1,000 in a corporate bond fund or in a common stock fund. The following table represents the annual return (per $1,000) of each of these investments under various economic conditions and the probability that each of those economic conditions will occur. Compute the expected return for the corporate bond and for the common stock fund. Show your calculations on excel for expected returns. Compute the standard deviation for the corporate bond fund and for the common stock fund. Would you invest in the corporate bond fund or the common stock fund? Explain. If choose to invest in the common stock fund and in (c), what do you think about the possibility of losing $999 of every $1,000 invested if there is depression. Explain.Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function c. Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. 1. Suppose the actuarially fair premium charge is 2600, Calculate Tess’ expected utility with full insurance if she is charged the premium. Round to two decimal places. 2. What is the premium that private insurance companies will charge for full insurance? Round to two decimal places. 3.Assume the social welfare function is the sum of the Tess’ and Lex’s utility functions. Select the correct statement regarding the explanation for what has happened in the private market and the role of social insurance. a.Adverse section has lead to market failure. The government could improve social welfare by…Consider the following data: x 44 55 66 77 88 P(X=x)P(X=x) 0.30.3 0.20.2 0.20.2 0.10.1 0.20.2 Copy Data Step 1 of 5: Find the expected value E(X)E(X). Round your answer to one decimal place.
- A wheel of fortune in a gambling casino has 54 different slots in which the wheel pointer can stop. Four of the 54 slots contain the number 9. For a 1 dollar bet on hitting a 9, if he or she succeeds, the gambler wins 10 dollars plus the return of the 1 dollar bet. What is the expected value of this gambling game? What is the meaning of the expected value result?Leora has a monthly income of $20,736. Unfortunately, there is a chance that she will have an accident that will result in costs of $10,736. Thus leaving her an income of only $10,000. The probability of an accident is 0.5. Finally assume that her preferences over income can be represented by the utility function u(x) = 2ln(x).a) What is the expected income? What is Leora’s expected utility (you may leave in log form)? b) What is the certainty equivalent to her situation? What is the risk premium associated with her situation?c) What is the maximum that Leora would be willing to pay for a full insurance policy?d) Illustrate her expected utility, expected wealth, certainty equivalent, the risk premium and her willingness to pay for a full insurance policy in a diagram.An investor is considering three strategies for a $1,000 investment. The probable returns are estimated as follows: • Strategy 1: A profit of $10,000 with probability 0.15 and a loss of $1,000 with probability 0.85 • Strategy 2: A profit of $1,000 with probability 0.50, a profit of $500 with probability 0.30, and a loss of $500 with probability 0.20 • Strategy 3: A certain profit of $400 Which strategy has the highest expected profit? Explain why you would or would not advise the investor to adopt this strategy.
