Answered

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Mitigating Risk

The NBA finals feature the Denver Nuggets and the Miami Heat. A manufacturer has two choices:
1. Produce shirts and souvenirs for Denver. This is worth $10,000 if Denver wins and $900 if Denver loses.
2. Produce shirts and souvenirs for Miami. This is worth $10,000 if Miami wins and $900 if Miami loses.
3. Produce shirts and souvenirs for UC Davis: This is worth $3600 regardless of the outcome of the NBA finals. Suppose that the probability that Denver wins is 60%.

Calculate expected value for each of the three options. What choice would a risk-neutral manufacturer make?

Sagot :

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