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Unformatted text preview: =10,000*8%
$800
=10,000*9%
$900* Bad Market, (0.2)
=10,000*0%
$0
=10,000*9%
$900* EMV
$760
$900* By using the definition,
EVPI=Expected Value with perfect information – Expected Value without perfect information
 Expected Value with perfect information = 1,100×0.4 + 900×0.4 + 900×0.2 = $980
 Expected Value without perfect information = $900 EVPI= 980 – 900 = $80
Conclusion: The maximum willing to pay for a newsletter is changed to $80. CB2201 Sem B in 2012/2013 – TA1, TA3, TA4, TB5, TC4, TF4, TE3, TE4, TE5, TF1, and TF3
Q3.41 State of Nature
Investment Good Economy, 0.2 Fair Economy, 0.3 Poor Economy, 0.5
Fund A
$10,000
$2,000
$5,000
Fund B
$6,000
$4,000
0
a) Draw the decision tree to represent this situation. b) Which investment should you choose to maximize the expected value?
EMV (Fund A) = 10,000(0.2) + 2,000(0.3) + (5,000)(0.5) = $100
EMV (Fund B) = 6,000(0.2) + 4,000(0.3) + 0(0.5) = $2,400
Conclusion: The best decision is to invest Fund B with the optimal EMV = $2,400
c) Suppose there is question about the return of Fund A in a good economy. It could be higher or lower than $10,000. What
value for this would cause a person to be indifferent between Fund A and Fund B (i.e., the EMV(Fund A) and EMV (Fund B)
would be the same)?
Let X = Payoff for Fund A in a good economy
EMV (Fund A) = EMV (Fund B)
X (0.2) + 2,000(0.3) + (5,000)(0.5) = 2,400
0.2X = 4,300
X = 21,500...
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 Spring '14

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