Exam 23: Decision Making and Risk

Consider the following to answer the question(s) below: A farm owner who grows summer vegetables (e.g. tomatoes) must decide whether to employ additional pickers this season. If he does, he could hire either migrant workers or local teenagers who need summer employment. The migrant workers are more experienced, faster, but more expensive. Although the teenagers will work for less, they are not as experienced and tend to damage plants and produce. His profits, taking into account losses from unpicked perished or damaged produce, depend on whether there is a good or bad growing season. The payoffs are shown in the table below. -Based on the expected value approach, the farmer should

Compute the standard deviation for each action.

Consider the following to answer the question(s) below: A land owner is considering a community development project. Even though he realizes that the current market for housing is not very favourable, he believes that there will be an influx of retirees into the area within the next five years. He is trying to decide between two alternatives: (1) building detached homes in a planned retirement community or (2) building a smaller townhouse/condominium complex. Mortgage interest rates will affect his outcomes and the applicable payoff (in $ millions) table is shown below. -Suppose housing analysts predict that the probabilities for future mortgage interest rates going up, staying about the same, and going down are 0.35, 0.50 and 0.15, respectively. The expected value for building an active retirement community is

If the land owner is risk averse he would choose the action with the lowest Coefficient of Variation (CV). Which of the following is true?

Consider the following to answer the question(s) below: A farm owner who grows summer vegetables (e.g. tomatoes) must decide whether to employ additional pickers this season. If he does, he could hire either migrant workers or local teenagers who need summer employment. The migrant workers are more experienced, faster, but more expensive. Although the teenagers will work for less, they are not as experienced and tend to damage plants and produce. His profits, taking into account losses from unpicked perished or damaged produce, depend on whether there is a good or bad growing season. The payoffs are shown in the table below. -Using the maximin approach, which action should the farm owner choose?

Suppose housing analysts predict that the probabilities for future mortgage interest rates going up, staying about the same, and going down are 0.35, 0.50 and 0.15, respectively. Compute the expected value for each action. Based on these results, which action should the land owner choose?

The standard deviation for hiring migrant workers is

The standard deviation for an outdoor concert is

The expected value of perfect information is

Suppose the farmer's almanac predicts the probability of a good growing season this year to be 0.75. Compute the expected value for each action. Based on these results, which action should the farm owner choose?

If the farmer is risk averse, he would

Consider the following to answer the question(s) below: An investor has $10,000 to invest for one year. The choices for the placement of the funds include stocks, bonds, and mutual funds. The outcome of the investment however, will depend on the economic climate during the year. The table presents the payoffs in dollars for three possible economic scenarios. Forecasts suggest that the probability of a slowdown is 0.25, of no change is 0.50, and of growth is 0.25. Action Economic Climate -According to the maximax approach, the investor would place his $10,000 in

Consider the following to answer the question(s) below: A land owner is considering a community development project. Even though he realizes that the current market for housing is not very favourable, he believes that there will be an influx of retirees into the area within the next five years. He is trying to decide between two alternatives: (1) building detached homes in a planned retirement community or (2) building a smaller townhouse/condominium complex. Mortgage interest rates will affect his outcomes and the applicable payoff (in $ millions) table is shown below. -According to the maximin approach, the land owner should

The Return to Risk Ratio for bonds is

If the group is risk averse, they should

Compute the standard deviation for each action.

Compute the Coefficient of Variation for each action. If the land owner is risk averse, would the CV for each action lead to the same choice as the expected value? Explain.

Consider the following to answer the question(s) below: A land owner is considering a community development project. Even though he realizes that the current market for housing is not very favourable, he believes that there will be an influx of retirees into the area within the next five years. He is trying to decide between two alternatives: (1) building detached homes in a planned retirement community or (2) building a smaller townhouse/condominium complex. Mortgage interest rates will affect his outcomes and the applicable payoff (in $ millions) table is shown below. -Using the maximin approach, which action should the land owner choose?

The expected value with perfect information is

Consider the following to answer the question(s) below: A land owner is considering a community development project. Even though he realizes that the current market for housing is not very favourable, he believes that there will be an influx of retirees into the area within the next five years. He is trying to decide between two alternatives: (1) building detached homes in a planned retirement community or (2) building a smaller townhouse/condominium complex. Mortgage interest rates will affect his outcomes and the applicable payoff (in $ millions) table is shown below. -Based on the expected value approach, the land owner should