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a. What is the EVPI for Hugh Liedtke regarding Texaco's reaction to a counteroffer of $5 billion'7 Can you explain this result intuitively? b. The timing of information acquisition may make a difference. i. For example, suppose that Liedtke could obtain information about the final court decision before making his current decision (take the $2 billion or counteroffer $5 billion). What would be EVPI of this information 7 ii. Suppose that Liedtke knew he would be able to obtain perfect information only after he has made his current decision but before he would have to respond to a potential Texaco counteroffer of $3 billion. What would be EVPI in this case? c. In part b, EVPI for (ii) should be less than EVPI calculated in (i). Can you explain why? (Incidentally, if your results disagree with this, you should check your calculations!)

a. What is the EVPI for Hugh Liedtke regarding Texaco's reaction to a counteroffer of $5 billion'7 Can you explain this result intuitively? b. The timing of information acquisition may make a difference. i. For example, suppose that Liedtke could obtain information about the final court decision before making his current decision (take the $2 billion or counteroffer $5 billion). What would be EVPI of this information 7 ii. Suppose that Liedtke knew he would be able to obtain perfect information only after he has made his current decision but before he would have to respond to a potential Texaco counteroffer of $3 billion. What would be EVPI in this case? c. In part b, EVPI for (ii) should be less than EVPI calculated in (i). Can you explain why? (Incidentally, if your results disagree with this, you should check your calculations!)

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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1. Consider the Texaco-Pennzoil example reproduced in Figure 1. Counteroffer $5 Billion Accept $2 Billion Texaco Refuses Counteroffer (0.50) Texaco Counteroffers $3 Billion (0.33) Texaco Accepts $5 Billion (0.17) Refuse Final Court Decision Final Court Decision Settlement Amount ($ Billion) 2 Accept $3 Billion (0.2) (0.5) (0.3) (0.2) (0.5) (0.3) 10.3 5 0 10.3 5 0 3 Figure 1: Hugh Liedtke's decision tree for the Texaco-Penzoil dispute a. What is the EVPI for Hugh Liedtke regarding Texaco's reaction to a counteroffer of $5 billion'7 Can you explain this result intuitively? b. The timing of information acquisition may make a difference. i. For example, suppose that Liedtke could obtain information about the final court decision before making his current decision (take the $2 billion or counteroffer $5 billion). What would be EVPI of this information 7 ii. Suppose that Liedtke knew he would be able to obtain perfect information only after he has made his current decision but before he would have to respond to a potential Texaco counteroffer of $3 billion. What would be EVPI in this case? c. In part b, EVPI for (ii) should be less than EVPI calculated in (i). Can you explain why? (Incidentally, if your results disagree with this, you should check your calculations!)
Transcribed Image Text:1. Consider the Texaco-Pennzoil example reproduced in Figure 1. Counteroffer $5 Billion Accept $2 Billion Texaco Refuses Counteroffer (0.50) Texaco Counteroffers $3 Billion (0.33) Texaco Accepts $5 Billion (0.17) Refuse Final Court Decision Final Court Decision Settlement Amount ($ Billion) 2 Accept $3 Billion (0.2) (0.5) (0.3) (0.2) (0.5) (0.3) 10.3 5 0 10.3 5 0 3 Figure 1: Hugh Liedtke's decision tree for the Texaco-Penzoil dispute a. What is the EVPI for Hugh Liedtke regarding Texaco's reaction to a counteroffer of $5 billion'7 Can you explain this result intuitively? b. The timing of information acquisition may make a difference. i. For example, suppose that Liedtke could obtain information about the final court decision before making his current decision (take the $2 billion or counteroffer $5 billion). What would be EVPI of this information 7 ii. Suppose that Liedtke knew he would be able to obtain perfect information only after he has made his current decision but before he would have to respond to a potential Texaco counteroffer of $3 billion. What would be EVPI in this case? c. In part b, EVPI for (ii) should be less than EVPI calculated in (i). Can you explain why? (Incidentally, if your results disagree with this, you should check your calculations!)
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