BUSI 620 help Making Decisions/uophelp.com BUSI 620 help Making Decisions/uophelp.com | Page 33

Spreadsheet Problem 2: An individual is considering two investment
projects. Project A will return a zero profit if conditions are poor, a
profit of $4 if conditions are good, and a profit of $8 if conditions are
excellent. Project B will return a profit of $2 if conditions are poor, a
profit of $3 if conditions are good, and a profit of $4 if conditions are
excellent. The probably distribution of the conditions is as follows:
Conditions:
Probability
Poor
40%
Good
50%
Excellent
10%
1. Using Excel, calculate the expected value of each project and
identify the preferred project according to this criterion.
2. Assume that the individual’s utility function for profit is U(X) =X-
0.05X 2 . Calculate the expected utility of each project and identify
the preferred project according to this criterion.
3. Is this individual risk adverse, risk neutral, or risk seeking? Why?
Froeb et al.’s Chapter 17:
a) Individual problems: 17–1 and 17–4.
Individual Problem 17-1: You’re the manager of global opportunities for
a US manufacture, who is considering expanding sales into Europe.
Your market research has identified three potential market opportunities:
England, France, and Germany. If you enter the English market, you
have a 0.5 chance of a big success (selling 100,000 units at a per-unit
profit of $8), a 0.3 chance of moderate success (selling 60,000 units at a
per-unit profit of $6), and a 0, 2 chance of failure (selling nothing). If
you enter the German market, you have a 0.2 chance of huge success
(selling 150,000 units at a per-unit profit of $10), a 0.5 chance of
moderate success (selling 70,000 units at a per-unit profit of $6), and a
0.3 chance of failure (selling nothing). If you can enter only one market,
and the cost of entering the market (regardless of which market you
select) is $250,000, should you enter one of the European markets? If so,
which one? If you enter, what is your expected profit?