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Unformatted text preview: 1 Section Notes Week 7 Outline Key Concepts Review of Problem Set 1 Option Value Questions regarding PS 2 Risk Premium Valuation methods: synthesis Hedonic Pricing Example: wild bee pollination Discount Rate Option value Interest Rate Valuation WTP vs. WTA: WTP is area under an individual’s demand curve. WTA is the amount you’ll accept in return for giving up all benefits of a resource that you own. WTP<WTA because WTP is bounded by a budget constraint. You should be able to calculated Expected Benefit of a project, when there is a possibility of different outcomes. If an organization is risk adverse , then their willingess to pay for a project is less than the Expected Benefit. The risk premium is the Expected Benefit minus the actual WTP. Example: An environmental project has a 0.5 probability of making $100, a 0.3 probability of making $200, and a 0.2 probably of making $50. What is the Expected Benefit? If the firm is risk adverse and its WTP for the project is $100, what is the risk premium?is risk adverse and its WTP for the project is $100, what is the risk premium?...
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- Spring '09
- Probability, WTA, option value