Scott Myers is a security analyst for a telecommunications firm called Webtalk. Although he is optimistic about the firm’s future, he is concerned that its stock price will be hugely affected by the condition of credit flow in the economy. He believes that the probability is 0.20 that credit flow will improve significantly, 0.50 that it will improve only marginally, and 0.30 that it will not improve at all. He also estimates that the probability that the stock price of Webtalk will go up is 0.90 with significant improvement in credit flow in the economy, 0.40 with marginal improvement in credit flow in the economy, and 0.10 with no improvement in credit flow in the economy.

a. Based on Scott’s estimates, what is the probability that the stock price of Webtalk goes up?

b. If we know that the stock price of Webtalk has gone up, what is the probability that credit flow in the economy has improved significantly? P-258