Question

The Place-Plus real estate development firm in Problem 24 is dissatisfied with the economist’s estimate of the probabilities of future interest rate movement, so it is considering having a financial consulting firm provide a report on future interest rates. The consulting firm is able to cite a track record which shows that 80% of the time when interest rates declined, it had predicted they would, whereas 10% of the time when interest rates declined, the firm had predicted they would remain stable and 10% of the time it had predicted they would increase. The firm has been correct 70% of the time when rates have remained stable, whereas 10% of the time it has incorrectly predicted that rates would decrease, and 20% of the time it has incorrectly predicted that rates would increase. The firm has correctly predicted that interest rates would increase 90% of the time and incorrectly predicted rates would decrease 2% and remain stable 8% of the time. Assuming that the consulting firm could supply an accurate report, determine how much Place-Plus should be willing to pay the consulting firm and how efficient the information will be.



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  • CreatedJuly 17, 2014
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