Engineering Economy, Student Value Edition (17th Edition)
17th Edition
ISBN: 9780134838137
Author: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher: PEARSON
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Chapter 12, Problem 25P
To determine
Calculate the time period.
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ABC Inc. must make a decision on its current capacity for next year. Estimated profits (in $000s) based on next year's
demand are shown in the table below.
Alternative
Expand
Subcontract
Do nothing
Refer to the information above. Assume that ABC Inc. has hired a marketing research firm that provided additional
information regarding next year's demand. Suppose that the probabilities of low and high demand are assessed as follows:
P(Low) = 0.4 and P(High) = 0.6.
What is the expected value under certainty?
160
0
Next Year's Demand
Low High
$100 $200
$50 $120
$40
$50
140
200
Sh.11.
Q2. (i)
Consider a risk averse investor who must decide how much of his
initial wealth w to put into a risky asset. The risky asset can have any of the positive
or negative rates of return r with probability density function f(r). If ß is the amount
of wealth to be put into the risky asset, final wealth under rate of return r will be
(w B) + (1+r)ß = w+ ßr. The investor's problem is to choose 3 to maximize the
expected utility of wealth. We can write this formally as the following single-variable
optimization problem
(1)
Suppose we have interior optimal 3* falls in (0, w), which is determined by the following
first order condition:
Ju'(w + ßr)rf(r)dr = 0.
(2)
Define A(w)
as a measure of absolute risk aversion. Please show that if
u(.) displays decreasing absolute risk aversion (DARA), i.e. A(w) decreases with w, then
the risky asset must be a "normal" good, i.e. 3* increases with w. [Hint: Please read
Example 2.6 in Jehle and Reny.]
max fu(w + Br)f(r)dr s.t.: 0 ≤ B ≤w.
B
u" (w)
=
u'…
Chapter 12 Solutions
Engineering Economy, Student Value Edition (17th Edition)
Ch. 12 - Prob. 1PCh. 12 - Prob. 2PCh. 12 - A new snow making machine utilizes technology that...Ch. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Prob. 8PCh. 12 - Prob. 9PCh. 12 - Prob. 10P
Ch. 12 - Prob. 11PCh. 12 - Prob. 12PCh. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Prob. 18PCh. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - If the interest rate is 8% per year, what decision...Ch. 12 - Prob. 24PCh. 12 - Prob. 25PCh. 12 - Prob. 26SE
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