What is the expected profit, Managerial Economics

Assignment Help:

The Barcelona Football Club is considering the signing of a player of international fame. The problem is that the player has a reputation for having a weak knee. The probability that the club assigns to the event that the player is injured during the season (state θ1) is 30%. The expected revenue is €18 million if there are no injuries (state θ2) and €3 million if there is an injury (state θ1). Assume that the club is risk neutral and wants to maximize the expected profit.

a) If the cost of the contract is €15 million, what is the club's optimal decision? What is the expected profit?

We now consider the possibility that the club, before making its decision, can have the player pass a medical examination. Doctors can issue a negative report (β1), suggesting that his knee is not strong enough to endure the season, or positive (β2), suggesting that his knee is fine. The probability that the medical report is negative when the knee is really bad, P(β1¦θ1), is 80%, the probability that the report is positive when the knee is really good, P(β2¦θ2), is also 80% (in other words, in each state there is a 20% chance that the doctors are wrong).

b) Represent the decision tree when the medical examination is done.

c) Compute the joint probabilities P(βj, θi), the probabilities of the signals P(βj), and the conditional probabilities P(θi¦βj).

d) What is the club's optimal strategy? What is the expected profit?

e) What is the value of the doctors' opinion?


Related Discussions:- What is the expected profit

Traditional theoretical concepts to business behaviour, Traditional theoret...

Traditional theoretical concepts to actual business behaviour Accommodating traditional theoretical concepts to actual business behaviour and conditions: Managerial economic

What do you mean by external economies, Q. What do you mean by External Eco...

Q. What do you mean by External Economies? External economies arise outside the firm as a result of improvement in industrial environment in that the firm operates. They are ex

PRICE CUTS FOR MEDICINE case study, 1. What kind of market structure is inv...

1. What kind of market structure is involved for the sale of medicines and vitamins? 2. What can be said about barriers to entry in this market? 3. Might there be a change in mar

External debt problem, External Debt Problem External debt refers to d...

External Debt Problem External debt refers to debt owing by one country to another.  External debt is a more serious problem than internal debt because the payment of interest

Estimate the demand function, You're standing at three light switches at th...

You're standing at three light switches at the bottom of stairs to the attic. Each one corresponds to one of three lights in the attic, but you cannot see the lights from where you

Consumer welfare, '' monopoly is good for consumer welfare" is this crrect

'' monopoly is good for consumer welfare" is this crrect

Effectiveness of trade unions in developing countries, Effectiveness of Tra...

Effectiveness of Trade Unions in Developing Countries Trade Unions in developing countries tend to be less effective in their wage negotiations with employers than their count

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd