Assignment
Determine whether or not to stock a large supply of steel. There is uncertainty in the price of steel. Based on past history the following data are available
|
Price (future)
|
Prob (Price)
|
PW if stocked
|
PW if not stocked
|
|
High
|
0.3
|
100000
|
0
|
|
Medium
|
0.5
|
-10000
|
0
|
|
Low
|
0.2
|
-50000
|
0
|
What is the probability that stocking steel will result in a negative present worth (PW)? How does one's attitude toward risk influence the decision whether or not to stock the steel?
Assume the information in Problem 3. Suppose a market research firm can be hired to reduce the uncertainty in the forecast of whether the price of steel will rise or fall, relative to the current price level. The research company does a pretty good job forecasting the direction of the price change when the future price is either high or low, but does no better than a coin toss if the future price is medium. The following data are available regarding the track record of the firm in forecasting whether the price of steel will rise or fall.
|
Price (future)
|
Rise
|
Fall
|
|
High
|
0.9
|
0.1
|
|
Medium
|
0.5
|
0.5
|
|
Low
|
0.7
|
0.3
|
NOTE - The research firm is not forecasting whether the future price will be high, medium, or low. Rather the research firm forecasts whether the future price will be higher (rise) or lower (fall) relative to the current price. The table can be verbalized as follows:
1. In 9 out of 10 cases when the future price of steel is high, the firm forecasts a rise in price from the current price, i.e., P (rise | price=high) = 0.9, or, in words: the probability the firm forecasts a rise in price given that the future price turns out to be high is 90%.
2. In 5 out of 10 cases when the future price of steel is medium, the firm forecasts a rise in price from the current price, i.e., P (rise | price=medium) = 0.5, or in words: the probability the firm forecasts a rise in price given that the future price turns out to be medium is 50%.
3. In 7 out of 10 cases when the future price of steel is low, the firm forecasts a rise in price from the current price, i.e., P (rise | price=low) = 0.7, or in words: the probability the firm forecasts a rise in price given that the future price turns out to be low is 70%.
How much should we be willing to pay this firm for their forecast?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.