EC260 Lecture Notes - Lecture 9: Perfect Information, Utility, Risk Neutral
Document Summary
Risk or a hazard of experience loss. Bigger risk bigger chance of loss or greater potential loss. When all possible outcome are listed a probability of occurrence is assigned to each possible outcome the resulting table is called probability distribution. Expected profit = sum (n x p) Comparing expected profits allows managers to decide which set of actions is preferred. Decision tree can help managers visualize what strategies to follow over a period and which outcomes from their strategic choices. At each decision point there are branches that represents decisions that can be made (decision fork) At each decision fork a firm must decide whether to increase price or not. Managers can purchase information that can help reduce uncertainty but the question is how much should managers be willing to pay for the info. The value of perfect information should be equal to the increase in expect profit resulting from getting the information.
