Jeffrey, who is risk neutral, is thinking about investing in one of two mutually exclusive projects. The data are summarized in the table below:

Project A requires an investment of $200 up front. Project B requires an investment of $300 up front. It pays $600 if it rains, $800 if it snows, $400 if it hails, and $0 if it's sunny. Project B requires an investment of $300 up front. It pays $200 if it rains, $0 if it snows, $600 if it hails, and $700 if it's sunny. The probability of each outcome is 0.1 for rain, 0.3 for snow, 0.2 for hail, and 0.4 for sun.
a. What is the net expected payoff from each project? Which is better for Jeffrey, and by how much?
b. Suppose a meteorologist can forecast the weather with perfect accuracy. How much will Jeffrey pay for the information?

Transcribed Image Text:

Rain $600 $200 Hail $400 $600 Project Snow Sunny $800 $0 0.30 $0 $700 B pr. 0.10 0.20 0.40