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Expected monetary value

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?

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 ...

Solution Summary

This gives information about a manufacturing company and then asks:
a) what decision should she make if she uses the expected monetary value criterion?
b) what is the expected value of Perfect information?

$2.19