PS2_2009 - UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS...

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UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS EWMBA 201A—Economic Analysis for Business Decisions Fall 2009 Felix Várdy Problem Set #2 Doing these problems is optional. The solutions to these questions will be posted by Friday, August 21 and discussed in section the next day. As always, the educational value of these exercises will be maximized if you attempt to answer these questions before you look at the answers. Question 1 Old MacDonald has a farm. On her farm she can grow either tomatoes or cacti (with a squish squish here and a squish squish there, e-i-e-i-o). Cacti are drought resistant, while tomatoes are not. A crop of cacti will produce a profit of $18,000 regardless of the weather, while a crop of tomatoes will produce a profit of $30,000 if there is no drought and $10,000 if there is a drought. The probability of a drought is ½. (a) Draw Old MacDonald's decision tree. (b) If Old MacDonald is an expected value maximizer (value is profit, in this case), what crop should she grow? What would her expected profit be? (c) You find out that Old MacDonald chose to grow cacti.
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PS2_2009 - UNIVERSITY OF CALIFORNIA HAAS SCHOOL OF BUSINESS...

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