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Expected monetary value

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The Thomas manufacturing company has \$100,000 available to invest Doctor Thomas the president and CEO of the company, would like to choose one of the following three alternatives:
1. Expand her production
2. Invest the money in stocks
3. Purchase a certificate of deposit from the bank.
the unknown is whether the economy will continue at a high level or there will be a recession. She estimates the likelihood of a recesson at 0.20 whethere there is a recession or not, the certificate of deposit will result in a gain of 6 percent. if there is a recession she predicts 10 percent loss if she expands her production and a 5 percent loss if she invests in stocks. If there is not a recession, an expansion of production will result in a 15 percent gain and stock investment will produce a 12 percent gain.
a) what decision should she make if she uses the expected monetary value criterion?
b) what is the expected value of Perfect information?

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Solution Preview

probability that there will be a recession p(r) = 0.2
probability that there will be no recession p(nr) = 0.8

a.)
The expectations of expansion her ...