a promising college football talent has to decide whether or not to enter this y

Question

a promising college football talent has to decide whether or not to enter this years NFL draft. If he enters he expects that there is a 50% chance that he is a first round pick and a 50% chance that he is picked in a later round. As a first round pick, he would secure a 5 million dollar contract, if he is picked in a later round, his contract would only be worth $500,000. If he does not enter the draft this year and continues to play in college, his change of being a first round pick nect year will increase to 75% (the contracts for the first and later round picks are the same as in the previous year, $5 million and $500,000) However there is a 20% change that he suffers a career ending injury next season, in which case he would make $50000 as an assistance coach for a college team. What should the player do? What is the EMV of his optimal choice?

a. He should enter now and the EMV of his choice is 2.75 million

b. He should enter next year and the EMV od his choice is 3.11 million

c. He should enter this year, as the expected loss in case of an injury is too high

d. He should enter next year and the EMV of his choice is 3.695 million

Explanation / Answer

For first year : P(first round pick up) = P(later round pick up) = 0.5

expected mean value i.e EMV for first year = 5,000,000*0.5+50,000*0.5 = 2.75 million

For second year :  P(first round pick up) = 0.75 P(later round pick up) = 0.25

P(career ending injusry session) = 0.20

EMV =( 5 mn * 0.75 + 0.5mn * 0.25)*0.8 + 0.05*0.2

as in 20% of the cases player will get 0.05mn and for rest 80% ( 5 mn * 0.75 + 0.5mn * 0.25)

= 3.11 mn

so, option b  He should enter next year and the EMV od his choice is 3.11 million

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.