Asked by Nicholas Alvarez on Jun 30, 2024
Verified
Dante has two possible routes to travel on a business trip. One is more direct but more exhausting, taking one day but with a probability of business success of 1/4. The second takes three days, but has a probability of success of 2/3. If the value of Dante's time is $1000/day, the value of the business success is $12,000, and Dante is risk neutral,
A) it doesn't matter which path he takes, because he doesn't consider risk.
B) he should take the 1-day trip, because he doesn't consider risk.
C) he should take the 1-day trip, because $11,000 is greater than $9,000.
D) he should take the 3-day trip, because it will increase his expected net revenue by $3,000.
E) he should take the 3-day trip, because it will increase his expected net revenue by $5,000.
Risk Neutral
Condition of being indifferent between a certain income and an uncertain income with the same expected value.
Business Success
The achievement of financial and operational goals within a business, often measured by profitability, market share, or other performance indicators.
Expected Net Revenue
Expected net revenue is the anticipated profit calculated by subtracting expected costs from expected total revenue.
- Review investment proposals with an emphasis on risk preferences and predicted outcomes.
Verified Answer
ZK
Zybrea KnightJul 03, 2024
Final Answer :
D
Explanation :
Dante's expected net revenue for the 1-day trip would be:
$12,000 * 1/4 - $1000 = $2000
Dante's expected net revenue for the 3-day trip would be:
$12,000 * 2/3 - $3000 = $5000
Therefore, by taking the 3-day trip, Dante can increase his expected net revenue by $3,000, so he should choose the 3-day trip.
$12,000 * 1/4 - $1000 = $2000
Dante's expected net revenue for the 3-day trip would be:
$12,000 * 2/3 - $3000 = $5000
Therefore, by taking the 3-day trip, Dante can increase his expected net revenue by $3,000, so he should choose the 3-day trip.
Learning Objectives
- Review investment proposals with an emphasis on risk preferences and predicted outcomes.