This preview shows page 1. Sign up to view the full content.
Unformatted text preview: max choice is to construct a large plant
2. Maximin choice is to do nothing
3. Equally likely choice is to construct a small plant A – 14 Risk Each possible state of nature has an
assumed probability States of nature are mutually exclusive Probabilities must sum to 1 Determine the expected monetary value (EMV) for
each alternative A – 15 Expected Monetary Value
( EMV or EV)
EMV (Alternative i) = (Payoff of 1st state of nature) x
(Probability of 1st state of
+ (Payoff of 2nd state of nature) x
(Probability of 2nd state of
+…+ (Payoff of last state of nature)
x (Probability of last state of
nature) A – 16 EMV Example
States of Nature
Market Construct large plant (A1) $200,000 -$180,000 Construct small plant (A2) $100,000 -$20,000 Do nothing (A3) $0 $0 Probabilities .50 .50 Alternatives 1. EMV(A1) = (.5)($200,000) + (.5)(-$180,000) = $10,000
2. EMV(A2) = (.5)($100,000) + (.5...
View Full Document
This document was uploaded on 02/19/2014.
- Spring '14