$1M is available to invest in S or B. The percentage yield on each investment depends...

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$1M is available to invest in S or B. The percentage yield oneach investment depends on whether the econ has a good or badyear.
Econ has a Good year    Econ has a Bad year
Yield on S    22% of 1M 10% of 1M
   (i.e. $220,000)    ($100,000)
Yield on B 16% of 1M 14% of 1M
($160,000) ($140,000)
It is equally likely (50%) that the econ will have a good or badyear.
For $10,000, a firm can be hired to forecast the state of theecon. The firm's forecasts have the following probabilities:
p(Good forecast | Econ is good) = .8
p(GF | EIB) = .2
It is equally likely (50%) for EIG & EIB to occur
a) Calculate the following:
p(EIG | GF) =
p(EIB | GF) =
p(EIG | BF) =
p( EIB | BF) =
b) Draw a decision tree to determine to invest in S or B tomaximize expected profits. Should the firm be hired?
c) What are the values of the EVSI and EVPI?

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4.0 Ratings (759 Votes)

a We know the accompanying probabilitiesLet EIG be the occasion that the economy is great and EIB be theoccasion that the economy is awfulPEIG 050PEIB050Let GF be the occasion that the firm conjectures that theeconomy is great and BF be the occasion that the firm estimatesthat the economy is awfulWe know the accompanying restrictive probabilitiesThe peripheral likelihood of getting a decent conjecture isThe peripheral likelihood of getting a terrible estimate isPBF 1PGF 1050050Presently we get the probabilities that we needbMoving from the directly to one side we haveChance hub 6 Hire the firm disregard the expense to procurefor the time being and put resources into S if great figureThe normal esteem isChance hub 7 Hire the firm disregard the See Answer

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