Consider a situation where a firm is trying to decide on whether or not they should...
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Consider a situation where a firm is trying to decide on whether or not they should agree to a contract to invest in a project. They’re uncertain of the outcome of the project before agreeing to the terms. If the firm agrees to the contract and the project is successful they will receive $120. If the firm agrees to the contract and the project fails they will lose $40. If the firm rejects the contract they will receive $0 regardless of success or failure.
What is the threshold probability for success above which the firm should agree to the contract?
Provide your answer as a number between 0 and 1.00
Homework Answers
A firm would accept the contract if:
Expected Profit from accepting the contract 
Expected Profit from rejecting the contract
Hence threshold probability for success above which the firm should agree to the contract = 0.25
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