Lancy is selling Chinese noodle. She does not make the noodle herself and gets i
ID: 1255126 • Letter: L
Question
Lancy is selling Chinese noodle. She does not make the noodle herself and gets it from a supplier on a daily basis. The weather does not look good: there is a probability of 1 / 3 that there will be thunderstorm tomorrow. If there is thunderstorm tomorrow. Lancy will have to close her shop and thus earn nothing. If there is no thunderstorm tomorrow, she can earn a revenue of 8ISO. Consider two different scenarios: Lancy has ordered from the supplier the noodle for tomorrow and paid $90. What is her expected profit for tomorrow? Lancv''s son. Anthony, is a science major, and somehow he invented a machine that can forecast with 100% accuracy whether there will be thunderstorm. Lancy has yet to order the noodle for tomorrow, and Anthony comes to his mom offering to forecast the weather for her in exchange for some pocket money. Suppose Lancy is risk neutral. What is the maximum amount of pocket money she is willing to give to her son in exchange for the perfect forecast?Explanation / Answer
a) There is a 1/3 chance she earns 0 dollars, and a 2/3 chance she earns 180 dollars. So to find her expected revenue you would multiply .33 by 0 and then .66 by 180, and then add the two together to find expected revenue. You would then subtract her expenses from expected revenue to fine expected profit. b) Again, there is a 1/3 chance she earns 0 dollars, and a 2/3 chance she earns 180 dollars. So to find her expected revenue you would multiply .33 by 0 and then .66 by 180, and then add the two together to find expected revenue. The difference here is that on 1/3 days she won't need to spend the 90 dollars on the the noodle, so you need to calculated her expected expenses as well. This can be found by multiplying .33 by 0 and .66 by 90. Once again, you would then subtract her expenses from expected revenue to fine expected profit. The expected profit for this scenario should be higher than the original, since she doesn't have to spend 90 dollars every day. It also says she is risk neutral, meaning she has no preference in the risk, she just wants to have the same expected profit every day. So to find the amount she is willing to pay, you simply find the difference between the two expected profits.
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