12.28 Jay Olsen, a writer of novels, just has com- pleted a new thriller novel. A movie company and a TV network both want exclusive rights to market his new title. If he signs with the network, he will receive a single lump sum of $900, but if he signs with the movie company, the amount he will receive depends on how successful the movie is at the box office. (All $ units are in thousands.) • TV Network: $900 • Movie Payouts (in $) Probabilities Event Small box Medium box Large box office (S) office (M) office (L) $1,000 $3,200 0.60 0.1 $250 0.30 (a) Which option would you recommend based on the expected monetary value (EMV) crite- rion? (Assume that he is a risk-neutral person interested in maximizing the expected monetary value.) (b) How much would he be willing to pay to know the true state of nature? (c) Jay can send his novel to a prominent movie critic to assess the potential box office success. From his past experience, the movie critic's reli- ability of predicting the box office success is as follows. Favorable prediction means that it is highly likely the movie would be a box office. success. It will cost $20 to get his novel evalu- ated by the movie critic.
12.28 Jay Olsen, a writer of novels, just has com- pleted a new thriller novel. A movie company and a TV network both want exclusive rights to market his new title. If he signs with the network, he will receive a single lump sum of $900, but if he signs with the movie company, the amount he will receive depends on how successful the movie is at the box office. (All $ units are in thousands.) • TV Network: $900 • Movie Payouts (in $) Probabilities Event Small box Medium box Large box office (S) office (M) office (L) $1,000 $3,200 0.60 0.1 $250 0.30 (a) Which option would you recommend based on the expected monetary value (EMV) crite- rion? (Assume that he is a risk-neutral person interested in maximizing the expected monetary value.) (b) How much would he be willing to pay to know the true state of nature? (c) Jay can send his novel to a prominent movie critic to assess the potential box office success. From his past experience, the movie critic's reli- ability of predicting the box office success is as follows. Favorable prediction means that it is highly likely the movie would be a box office. success. It will cost $20 to get his novel evalu- ated by the movie critic.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:12.28 Jay Olsen, a writer of novels, just has com-
pleted a new thriller novel. A movie company and a
TV network both want exclusive rights to market his
new title. If he signs with the network, he will receive
a single lump sum of $900, but if he signs with the
movie company, the amount he will receive depends
on how successful the movie is at the box office. (All
$ units are in thousands.)
TV Network: $900
• Movie
Payouts (in $)
Probabilities
Event
Small box Medium box
office (M)
office (S)
$250
0.30
$1,000
0.60
Large box
office (L)
$3,200
0.1
(a) Which option would you recommend based
on the expected monetary value (EMV) crite-
rion? (Assume that he is a risk-neutral person
interested in maximizing the expected monetary
value.)
(b) How much would he be willing to pay to know
the true state of nature?
(c) Jay can send his novel to a prominent movie
critic to assess the potential box office success.
From his past experience, the movie critic's reli-
ability of predicting the box office success is as
follows. Favorable prediction means that it is
highly likely the movie would be a box office
success. It will cost $20 to get his novel evalu-
ated by the movie critic.
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