Unformatted text preview: whether dams are built today or tomorrow. . Dams are costless to construct, but there is some probability that building dams will hurt salmon runs in the future. Let c s d denote this cost, where c s is a random variable that takes the value 0 with probability p and the value 2 c with probability 1-p . Assume that b-2 c < 0, b > 0, c > 0. (a) Suppose you are required to make a choice of d 1 today and must choose d 2 = tomorrow. If you want to maximize the expected value of dam building, what do you do? What is your expected beneﬁt from dam building? (b) Suppose that the planner is able to delay construction of the dam until the future. What is the expected value today of an optimal construction policy tomorrow? (c) For the situation described above, what is the option value of non-use? (d) When is it likely to be important to think about option values? 1...
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- Fall '10
- Probability theory, Dam, dam building, Matt Turner, wealth maximizing way, optimal construction policy