You are romantically interested in Chris, but have always wanted to date the president of the Economics Club. As it turns out, Chris is battling Pat for control of the Econ Club. That battle should be decided in a year, and you estimate the odds of Chris winning at 60%. Attracting Chris and kindling a relationship will involve $1,000 of effort on your part; if Chris wins the presidency, you will receive benefits worth $2,200 (assume you receive these benefits one year after beginning the relationship). If Chris loses the election, you receive nothing.
a. Calculate the net present value of building a relationship with Chris today. Notice that the costs of kindling a relationship today are certain, but the benefits are uncertain.
b. Considering only your answer to (a), should you initiate a relationship with Chris at this time? Assume you are risk-neutral in formulating your answer.
c. Calculate the net present value of waiting until the presidency is decided to build a relationship with Chris. Note that both the costs and benefits of kindling a relationship are uncertain at this point, but that the two will be certain in one year.
d. Based on your answers to both (a) and (c), should you initiate a relationship with Chris today, or should you wait to initiate the relationship until the presidency is determined?