Question

Management is uncomfortable stating probabilities for the states of nature for a trade bill passing. Depending on its probability they will invest in one of three countries; A, B, or C.
Let p denote the probability of the bill passing.

0/5 pts Question 10 Management is uncomfortable stating probabilities for the states of nature for a trade bill passing. Depending on its probability they will invest in one of three countries; A, B, or C. Let p denote the probability of the bill passing. Trade Bill Trade Bill Passes Fails A 320 160 260 210 C 370 After further review, management estimated the probability of the trade bill passing at 0.65 If the probability is 0.65, which country should be selected and what is the expected value associated with that decision? Country B with an EV of 160 Country A with an EV of 264 Country C with an EV of 320 Country A with an EV of 210

Please explain to me how this answer was achieved. Thanks!

Answer 1

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The expected value of :

A: 320*.65 + 160*(1-.65) = 264
B: 260*.65 + 210*(1-.65) = 242.5
C: 370*.65 + 0*(1-.65) = 240.5

A has the highest expected value, and therefore A should be selected