$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?
