Should a risk neutral firm invest or not

Reference no: EM13198443

A firm is considering launching a new product. The launch will require an investment of $10 million. The launch is risky because the demand could turn out to be either low or high. If the demand is high, the investment would give a return of $30 million, and if the demand is low, the return would be 0, (leading to a negative net payoff). If the firm does not launch the product, the payoff is 0.

a. Should a risk neutral firm invest or not? Explain your answer using a decision tree.

b. If the firm could employ a market research firm that would find out the level of demand before the
firm invests, how much would it be willing to pay to the market research firm (assume that the payment has to be made before the market research firm discloses its results).

c. Should the firm invest if it's utility of $W million is sqrt(W +10) (measured in million dollars)?

Reference no: EM13198443

Questions Cloud

How long ago was the artifact made : A wooden artifact from an ancient tomb contains 40 percent of the carbon-14 that is present in living trees. How long ago was the artifact made? (The half-life of carbon-14 is 5730 years.)

Find the total profit function and break even point : Suppose that for a certain company C(x)=25 x+500,000 represents the total cost function and R(x)=75x represents the total revenue function. Find the total profit function and break even point.

What is the optimal value of x of an utility function : Suppose there is a risky stock which returns $4 with probability 0.5 and 0 with probability 0.5 for every dollar invested. Suppose for every dollar, I invest a share x in A and (1-x) in risk free government bonds.

What was the initial population at time : the doubling period of a baterial population is 10 minutes. At time t=110 minutes, the baterial population was 90000.

Should a risk neutral firm invest or not : The launch is risky because the demand could turn out to be either low or high. If the demand is high, the investment would give a return of $30 million, and if the demand is low, the return would be 0.

Should she send the two articles together in same package : Lori, who is risk averse, has two pieces of jewelry, each worth $400. She wants to send them to her sister in Mexico. She is concerned about the safety of shipping them. She believes that the probability that a shipped package will not arrive is q..

Adolescent smoker-construct of the health belief model : An adolescent smoker might think lung cancer only happened to old people. This is an example of which construct of the Health Belief Model?

Who among the three will make the investment : Barry's utility function is U(W) = W^2. Carl's utility function is U (W )= sqrt(W) . Each has wealth of only $100. An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.

An earth orbiting satelite has closest approach altitude : An Earth orbiting satelite has closest approach altitude of 1000km. The velocity at this point is 8km/s. Find the following elements:

User Account

All Pages