HWA04 - 1 or s 2 are true(as 900 beats 625 or 225 and Ralph...

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1 Managerial ACG 2071 Professor Lin Spring 2006 Solution to #04 1. Between #3 and #5, Ralph always prefers #5. Between #3 and #4, Ralph always prefers #3 since #3 more likely produces high output. Between #2 and #1, Ralph always prefers #2 since #1 spreads out more. Expected Cash Flows EU CE RP #1 2500 48.59 2361 139 #2 2500 49.74 2475 25 #3 2600 50.75 2576 24 #4 2400 48.74 2376 24 #5 3200 55.84 3118 82 The calculation confirms the prediction. Ralph would have the following ranking: #5 > #3 > #2 > #4 > #1 Ralph will choose #5. Comment: (1) #1 and #2 have the same expected cash flows. But since #1 cash flows spread out more, it is more risky. For risk-averse Ralph, he would require higher risk premium. 2. 4-10 [a] E[w one] = ¾(225) + ¼(100) = 193.75 E[w two] = ½(900) + ½(100) = 500 E[w three] = ¾(625) + ¼(100) = 493.75 [b] With this information, Ralph will clearly take two if s
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Unformatted text preview: 1 or s 2 are true (as 900 beats 625 or 225); and Ralph will take three otherwise (as 50 - 50 odds on 625 or 100 beats 100 for sure or 50 - 50 odds on 225 or 100). two info perfect info 100 .5 .25 .25 225 625 .25 .25 900 .5 .5 .5 How much would Ralph pay for the information? The performance gain is .25(100) + .25(625) + .5(900) - .5(100) - .5(900) = 131.25. Notice having this information renders perfect information superfluous. 2 [c] If the information is not available, Ralph takes choice two. Ralph substitutes the lottery two for the improved info lottery. A lower quality decision is implemented when the information is too costly. [d] Here the information is useless. No matter what is revealed, Ralph's best choice is two! 3. 4-15 (1) With simultaneous play, an equilibrium is (down, right). (2) If Column plays first, an equilibrium for sequential play is (up, left)....
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HWA04 - 1 or s 2 are true(as 900 beats 625 or 225 and Ralph...

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