Refer to the Following Payoff Table

question 14

Multiple Choice

Refer to the following payoff table:

There is an option of paying $100 to have research done to better predict which state of nature will occur. When the true state of nature is S1, the research will accurately predict S1 60% of the time. When the true state of nature is S2, the research will accurately predict S2 80% of the time.
What is the posterior probability of S2 given that the research predicts S2?

• A) 0.18
• B) 0.44
• C) 0.57
• D) 0.65
• E) 0.82

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Definitions:

Credit

An accounting entry that increases a liability or equity account or decreases an asset or expense account, reflecting the opposite of a debit.

Basic Accounting Equation

Assets = Liabilities + Stockholders’ Equity.

Assets

Resources owned by a business or individual that have economic value and can be converted into cash.

Liabilities

Financial obligations owed by a business to others, such as loans, accounts payable, mortgages, deferred revenues, or bonds.