The better investment between the two.

Question

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Answer 1

Question

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

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In a classic oil-drilling example, you are trying to decide whether to drill for oil on a field that might or might not contain any oil. Before making this decision, you have the option of hiring a geologist to perform some seismic tests and then predict whether there is any oil or not. You assess that if there is actually oil, the geologist will predict there is oil with probability 0.85 . You also assess that if there is no oil, the geologist will predict there is no oil with probability 0.90. Please answer the two questions below, as I am trying to ensure that I am correct. 1. Why will these two probabilities not appear on the decision tree? 2. Which probabilities will be on the decision tree?

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Answer 2

Question

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Answer 6

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.

Economics Concept Introduction

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Answer 7

Chapter 12, Problem 21PAA

To determine

To explain: The better investment between the two.

Answer 8

Expert Solution & Answer

Answer to Problem 21PAA

The better investment plan will be to invest in first fast food chain..

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

From the two fast food chains, investment must be made in the franchise from where the expected value of profit is more and the risk associated with the investment is less.

The expected value of a variable is the sum of probabilities that different profits would be there multiplied with the resulting payoffs.

The aggregate 10 year profit by both the fast food giants is,

E(π)=q1π1+q2π2+q3π3

Here, the profit is E the probability is q and the resulting payoffs is π .

Here, q1+q2+q3+...+qn=1

For first fast food chain the expected profit is,

EM(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

For second fast food chain the expected profit is,

ES(π)=q1π1+q2π2+q3π3=(0.025)(48)+(0.95)(8)+(0.025)(−48)=7.6

The variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2

Here, the variance is σ2 , the profit is E the probability is q and the resulting payoffs is π .

For first fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[16−7.6]2+0.5[8−7.6]2+0.25[−1.6−7.6]2=38.88

For second fast food chain the variance is,

σ2=q1[π1−E(π)]2+q2[π2−E(π)]2+q3[π3−E(π)]2=0.25[48−7.6]2+0.5[8−7.6]2+0.25[−48−7.6]2=118.24

The expected profit for both is same, the risk associated with the investment in Subs is m ore than risk involved in McDonald’s on the account of higher variance in the former option

Hence, the better investment plan will be to invest in first fast food chain.