options for the last two blanks are increase or decrease

5. Real options Nick and Rosa are going to a music festival and are debating whether they should buy food at the festival or bring sandwiches. They only have $7 each to spend on food but would prefer the convenience of buying sandwiches at the festival to the task of preparing them beforehand. If they bring sandwiches, they will eat them regardless of how much food costs at the festival (having already expended the effort of preparing the sandwiches), and will get a utility of 10. Alternatively, if they don't bring sandwiches and are able to buy food for $7 or less, they will get utility of 20. However, if food at the festival costs more than $7 and they don't get to eat, they will get a utility of O. The numbers in the following table reflect the utility Nick and Rosa get under each of the described outcomes. Food Price More than $7 $7 or Less Options (1) Try to buy food (2) Bring sandwiches 0 20 10 10 , and the expected If the probability that food costs more than $7 is 50%, then the expected value of utility from not preparing food is value of utility from bringing sandwiches is Now, suppose Nick and Rosa consider a third option: if food at the festival costs more than $7, buy sandwiches for less than $7 at a nearby deli and bring them back to the festival. If Nick and Rosa can choose to try to buy food at the festival, knowing they have the option to buy sandwiches at the deli, they now will get either a utility of 10 (if food costs more than $7 and they have to leave the festival to go to the deli) or a utility of 20 (if food costs $7 or less and they can buy it at the festival). Assuming the same probabilities as before, the expected value of utility from not preparing food (with the option to convert to buying sandwiches at the deli) is ; therefore, the value of the real option is Suppose, instead, that if they don't get to eat, it won't actually bother them much. That is, they will get a utility of 5 (rather than 0) if food costs more than $7 and they neither brought food nor have the option of going to the deli. This the variability of their outcomes and, thus, the value of the real option to buy sandwiches at the deli