3. Suppose now that the market research study has a cost. What would be the maximum amount that you would be willing to pay for market research? (a) (b) $19,000 $147,000 (c) $0 (d) $1,000 (e) $60,000

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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A development corporation purchased land that will be the site of a new luxury condominium complex. Management is considering a six month market research study designed to learn more about potential market acceptance of the condominium project. Management anticipates that, if conducted, the market research study will provide one of the following two results.

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.

With
Research 2
1
F 0.59
No
Research
U 0.41
3
d₁
d₂
4
5
d₂
d₁
d₂
6
7
8
9
10
11
S₁0.56
$₂ 0.44
S₁0.56
$₂0.44
$₁0.19
$₂ 0.81
S₁ 0.19
$₂ 0.81
S₁ 0.41
$₂ 0.59
S₁ 0.41
$₂ 0.59
200
600
800
400
200
600
800
400
200
600
800
400
Transcribed Image Text:With Research 2 1 F 0.59 No Research U 0.41 3 d₁ d₂ 4 5 d₂ d₁ d₂ 6 7 8 9 10 11 S₁0.56 $₂ 0.44 S₁0.56 $₂0.44 $₁0.19 $₂ 0.81 S₁ 0.19 $₂ 0.81 S₁ 0.41 $₂ 0.59 S₁ 0.41 $₂ 0.59 200 600 800 400 200 600 800 400 200 600 800 400
3. Suppose now that the market research study has a cost. What would be the maximum amount that
you would be willing to pay for market research?
(a)
(b)
$19,000
$147,000
(c) $0
(d)
$1,000
(e) $60,000
Transcribed Image Text:3. Suppose now that the market research study has a cost. What would be the maximum amount that you would be willing to pay for market research? (a) (b) $19,000 $147,000 (c) $0 (d) $1,000 (e) $60,000
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