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Jay Boville Corporation is being sued by Lark Dent. Lark Dent can settle out of court and win $40,000 or go to court. If Lark goes to court, there is a 30% chance that she will win the case. If she wins, a small and a large settlement are equally likely. A small settlement nets $50,000 and a large settlement nets $300,000.
a) If Lark is risk-neutral, what should she do?
b) What should Lark due if her utility function for an increase in her cash position is given by .
c) For $10,000 Lark can hire a consultant who will predict who will win the trial. The consultant is correct 90% of the time. Should she hire the consultant? (Assume she is risk neutral). What is EVSI?
d) If Lark is risk neutral what is EVPI?
What would you expect to happen to the domestic money supply as R and Y both increase along a stable BB curve? Explain in intuitive terms what forces would tend to bring about such a change in the money supply.
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