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CMA Intermediate · Management Accounting · Decision Theory

Meera Exports faces two options. Option X gives Rs 80,000 with probability 0.7 and Rs 20,000 with probability 0.3. Option Y gives a certain Rs 60,000. Under the EMV criterion, the firm should:

Choose X. Its EMV is 0.7 x 80,000 plus 0.3 x 20,000, which is Rs 62,000, higher than the certain Rs 60,000 from Y. EMV ignores risk attitude and simply selects the higher expected value.

  1. Achoose X because its EMV is Rs 62,000Correct
  2. Bchoose Y because its EMV is Rs 60,000 and X is Rs 50,000
  3. Cchoose X because its EMV is Rs 70,000
  4. Dbe indifferent since both exceed Rs 60,000

Explanation

EMV of X = 0.7 x 80,000 + 0.3 x 20,000 = 56,000 + 6,000 = Rs 62,000, which exceeds Y's Rs 60,000. Choose X. Rs 70,000 comes from averaging probabilities incorrectly.

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