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Problem Set #5
Ec 201
Spring, 2009
Michigan State University
L. Martin
1.
Expected value and present value.
Although it is worried about political instability,
the Ronron Corporation is considering a major investment in India.
The current cost will
be $1 billion.
It conjectures that the uncertainty will be resolved next year.
The
probabilities and value of the investment in one year’s time are given in the table below.
Probability
value
expected value
0.3
$1.5
0.5
$2
0.2
$0
total
a.
Compute the expected value of the investment one year hence.
b.
The company’s opportunity cost of funds is 15%.
Find the present value of the
investment.
This is the market fundamental.
c.
Should the company go forward with the investment?
2.
Lab assistants can work in forensics or in disease research.
Disease research is
dangerous, and some lab assistants get seriously ill each year due to contact with bacteria
from their jobs.
This risk has a value of $200 per week.
In other words, a lab assistant
who is paid $800 per week perceives that her net wage is $600 because she bears the cost
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This note was uploaded on 10/17/2011 for the course EC 201 taught by Professor Haider during the Spring '10 term at Michigan State University.
 Spring '10
 HAIDER
 Microeconomics

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