A Chemical Company Is in the Process of Studying Two

question 9

Essay

A chemical company is in the process of studying two long-term plans. The first plan involves expansion of their industrial division. The second plan emphasizes expansion in the business of consumer pharmaceuticals. Market research reveals the following (preliminary) results (returns are in $ millions):
$\begin{array}{c}\text {INDUSTRIAL}\\\text {EXPANSION}\\\begin{array}{cc}\text { PROBABILITY } & \text { PROFITS } \\0.3 & 10 \\0.3 & 15 \\0.4 & 20\end{array}\end{array}$ $\begin{array}{c}\text { PHARMACEUTICALS }\\\begin{array}{cc}\text { PROBABILITY} &\text {PROFITS }\\0.2 & 0 \\0.3 & 10 \\0.3 & 20 \\0.2 & 40\end{array}\end{array}$ The planning committee has the (risk averse) utility function U = 10M - 0.05M2. Discuss the long-term planning decision based on the preliminary predictions and the given utility function:

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Definitions:

Arbitrageurs

Individuals or entities that attempt to profit from price differences of the same or similar financial instruments, on different markets or in different forms.

Capital Outflows

The movement of money for the purpose of investment, operations, or purchases away from a country or region.

U.S. Assets

Assets located within the United States, including real estate, stocks, bonds, and other financial instruments.

Appreciated

Refers to an increase in the value of an asset or currency over time.