You are considering setting up a firm to produce widgets. The cost of the project is $10 million today. The demand for widgets is uncertain. It can be either high or low with equal probability. When the demand is high cash flows in t = 1 are $20 million and when the demand is low cash flows in t = 1 are $5 million. The discount rate is 50%. Suppose you can commission a study that tells you whether the demand for widgets will be high or low. The study takes one year to complete. That is, if you commission the study you must decide in t = 1 whether to invest. If you invest the cash flows will arrive in t = 2. What is the maximum amount you are willing to pay for the study today?

1   all nations face the problem of scarcity because there are limited resources and unlimited wants. nations do not have enough factors of production to produce everything that their population wants. entrepreneurial resources initiate businesses to make new goods and services; labor resources produce goods and services.

2 there are four factors of production: natural resources, labor resources, capital resources, and entrepreneurial resources. natural resources are raw materials from nature that are used to produce goods. trees, water, and grains are natural resources. some natural resources, such as wheat and cattle, are renewable

3 wants

things that you do not need to have in order to survive, but would like to have

needs

things that you must have in order to survive

goods

physical products

services

tasks that a business perform for customers

resources

items that people can use to make or obtain what they need or want

determine

to settle or decide by choice of alternatives or possiblities

4 i really dont know

u = 30

continuing your method

= +

subtract from both sides

= - thus

= -

= ⇒ u = 30

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