Question - Joe is thinking about investing in the stock market. The payoff table is below.
|
Strong market
|
Fair market
|
Poor market
|
|
invest $8000
|
$800
|
$200
|
-$400
|
|
invest $4000
|
$400
|
$100
|
-$200
|
|
invest $2000
|
$200
|
$50
|
-$100
|
|
invest $1000
|
$100
|
$25
|
-$50
|
a) What is your decision using the maximax approach?
b) What is your decision using the maximin approach?
c) What is your decision using the equally likely approach?
d) If the stock market has a 0.1 probability of being strong and a 0.5 probability of being fair, does your decision change?
e) How much would you be willing to pay for an economic study predicting the behavior of the market?