Problem 23P

You have $1000, and a certain commodity presently sells for $2 per ounce. Suppose that after one week the commodity will sell for either $ 1 or $4 an ounce, with these two possibilities being equally likely.

(a) If your objective is to maximize the expected amount of money that you possess at the end of the week, what strategy should you employ?

(b) If your objective is to maximize the expected amount of the commodity that you possess at the end of the week, what strategy should you employ?

Solution:

Step 1 of 3:

We have $1000, and a certain commodity presently sells for $2 per ounce.

After one week the commodity will sell for either $1 or $4 an ounces, with theses two possibilities being equally likely.

- We have to find strategy in order to maximize the expected amount of money.
- We have to find strategy in order to maximize the expected amount of the commodity.