Consider the following example similar to the one discussed in the 'valuing information' part of the lectures. Suppose you are a rational, risk averse person and you have an idea to start a business; the business idea will cost 15 000 to commercialise. You know that there is a 1% chance that the business will be worth 2m and a 99% chance that it will be worth 0.

1. a)How much expected profit is there in the idea? How would your answer differ if a successful business was worth only 1m instead of 2m?
2. b)Now suppose that you can run a smaller scale experiment of the business. If the experiment gives a positive signal, this means that your business has a 10% chance of being successful (if it gives a negative signal, you will certainly fail). Furthermore, suppose that the experiment has a 10% chance of giving a positive signal (this preserves the original 1% chance of success). How does this affect expected profits? And how much might it be worth to run such an experiment?
3. c)Comment on the suitability of using expected profit in this case.