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Maximizing money

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You have $1000 and a certain commodity presently sells for $2 per ounce. Suppose that after one week the commodity will sell for either $1 or $4 an ounce, with these two probabilities being equally likely.

(a) If your objective is to maximize the expected amount of money that you possess at the end of the week, what strategy should you employ?

(b) If your objective is to maximize the expected amount of commodity that you possess at the end of the week, what strategy should you employ?

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Solution Summary

This solution identifies a strategy for maximizing the expected amount of money and maximizing the expected amount of commodity.

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Certain price now= $2 per ounce
After a week
Probability that price is $1 an ounce = 0.5
Probability that price is $4 an ounce = 0.5
(Since both the probabilities are equally likely, Probability of occurrence of each = ½ = 0.5 as total probability = 1)
Expected price = Probability of price of $ 1 x $1 + Probability of price of $ 4 x ...

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