(2) A speculator is considering the purchase of a commodity which he reckons has a 60% chance of increasing in value over the next month. If he purchases the commodity and it does increase in value the speculator will make a profit of about $200 000, otherwise he will lose $60 000.

(a) Assuming that the expected monetary value criterion is applicable, determine whether the speculator should purchase the commodity.

(b) Perform a sensitivity analysis on the speculator’s estimate of the probability of a price increase and interpret your result.

(c) What reservations would you have about applying the expected monetary value criterion in this context?