Mike has an option on a particular piece of land, and he must decide whether to drill on the land before the expiration of the option or give up his rights. If he drills, he believes that the cost will be $150,000. If he finds oil, he expects to receive $870,000; if he does not find oil, he expects to receive nothing. Mike believes that the probability of finding oil if he drills on this piece of land is 0.20, and the probability of not finding oil if he drills there is 0.80. Select ALL that is correct. (You may select more than one.) Mike will choose to drill if he is risk averse. Expected value is 40,000 Expected value is -15,000 Expected value is 24,000 Mike will choose to drill if he is risk neutral. Mike will not be able make decision because the expected value is zero. Mike will choose not to drill if he is risk loving.
Mike has an option on a particular piece of land, and he must decide whether to drill on the land before the expiration of the option or give up his rights. If he drills, he believes that the cost will be $150,000. If he finds oil, he expects to receive $870,000; if he does not find oil, he expects to receive nothing. Mike believes that the probability of finding oil if he drills on this piece of land is 0.20, and the probability of not finding oil if he drills there is 0.80. Select ALL that is correct. (You may select more than one.) Mike will choose to drill if he is risk averse. Expected value is 40,000 Expected value is -15,000 Expected value is 24,000 Mike will choose to drill if he is risk neutral. Mike will not be able make decision because the expected value is zero. Mike will choose not to drill if he is risk loving.
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:Question 25
Mike has an option on a particular piece of land, and he must decide whether to drill
on the land before the expiration of the option or give up his rights. If he drills, he
believes that the cost will be $150,000. If he finds oil, he expects to receive
$870,000; if he does not find oil, he expects to receive nothing. Mike believes that
the probability of finding oil if he drills on this piece of land is 0.20, and the
probability of not finding oil if he drills there is 0.80. Select ALL that is correct. (You
may select more than one.)
Mike will choose to drill if he is risk averse.
Expected value is 40,000
Expected value is -15,000
Expected value is 24,000
Mike will choose to drill if he is risk neutral.
Mike will not be able make decision because the expected value is zero.
Mike will choose not to drill if he is risk loving.
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