HW2_SolutionSet

# HW2_SolutionSet - Homework#2 Solution Set Problem 1...

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- 1 - Homework #2 Solution Set Problem 1 Solution: (a) Decision Outcome EMV Gas is discovered Gas is not discovered Sell exploration rights 1,980,000 180,000 1,260,000 Develop the field herself 5,700,000 300,000 3,300,000 (b) The landowner maximizes her expected gain by deciding not to sell the exploration rights and to develop the field herself. The optimal expected payoff associated with this decision is \$3,300,000. (c) (d) EVPI = EMV with (free) perfect information EMV without information = (0.6)(5,700,000) + (0.4)(180,000) 3,300,000 = 3,420,000 + 72,000 3,300,000 = \$192,000 (e) See Landowner_Gas_Exploration _39_Solution.xlsx

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- 2 - 1000000 1500000 2000000 2500000 3000000 3500000 \$130,000 \$140,000 \$150,000 \$160,000 \$170,000 \$180,000 \$190,000 \$200,000 \$210,000 \$220,000 \$230,000 Expected Value Energy Provider's Offer to Landowner (B5) Strategy Region of Decision Tree 'Landowner's Decision Problem' Expected Value of Node ' Sell exploration rights to a local energy provider?' (B27) With Variation of Energy Provider's Offe Yes No 500000 1000000 1500000 2000000 2500000 3000000 3500000 \$1,300,000 \$1,400,000 \$1,500,000 \$1,600,000 \$1,700,000 \$1,800,000 \$1,900,000 \$2,000,000 \$2,100,000 \$2,200,000 \$2,300,000 Expected Value Additional Value to Landowner (if gas is discovere (B6) Strategy Region of Decision Tree 'Landowner's Decision Problem' Expected Value of Node ' Sell exploration rights to a local energy provider?' (B27)
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• Fall '11
• Damien
• Game Theory, Probability theory, Landowner, Energy Provider, local energy provider

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