1. What is the optimal decision strategy? (a) Conduct Research, Medium if Favorable, Medium if Unfavorable (b) No Research, Medium (c) Conduct Research, Small if Favorable, Small if Unfavorable (d) Conduct Research, Medium if Favorable, Small if Unfavorable No Research, Small (e)
A development corporation purchased land that will be the site of a new luxury condominium complex. Management is considering a six month
1. Favorable report (F): A significant number of the individuals contacted express interest in purchasing a condominium.
2. Unfavorable report (U): Very few of the individuals contacted express interest in purchasing a condo- minium.
After deciding whether to conduct the market research study, they have the following two decision alternatives.
d1 = a small complex with 30 condominiums
d2 = a medium complex with 60 condominiums
Following this, a chance event concerning the demand for the condominiums has two states of nature. s1 = strong demand for the condominiums
s2 = weak demand for the condominiums
The payoffs, probabilities, and decision tree associated with this problem are given on the next page.
Note that payoffs are given in thousands of dollars.
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2. What is the expected profit for this project?
(a) $624, 000
(b) $583, 000
(c) $564, 000
(d) $1, 147, 000
(e) $573, 500
3. Suppose now that the
you would be willing to pay for market research?
(a) $19, 000
(b) $147, 000
(c) $0
(d) $1, 000
(e) $60, 000
4. What is the expected value of building a medium complex when the market research study is done?
(a) $564, 000
(b) $624, 000
(c) $583, 000
(d) $563
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