A real estate investor has the opportunity to purchase land currently zoned as residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table: State of Nature Rezoning Approved Rezoning Not Approved Decision Alternative s1 s2 Purchase, d1 610 -190 Do not purchase, d2 0 0 (a) If the probability that the rezoning will be approved is 0.5, what decision is recommended? Recommended Decision: What is the expected profit? Enter your answer in dollars. For example, an answer of $200 thousands should be entered as 200,000. $ (b) The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning proposal from area residents. Probabilities are as follows: Let H = High resistance to rezoning L = Low resistance to rezoning P(H) = 0.55 P(s1 | H) = 0.18 P(s2 | H) = 0.82 P(L) = 0.45 P(s1 | L) = 0.87 P(s2 | L) = 0.13 What is the optimal decision strategy if the investor uses the option period to learn more about the resistance from area residents before making the purchase decision? High resistance: Low resistance: (c) If the option will cost the investor an additional $10,000, should the investor purchase the option? The investor purchase this option, as the payoff of the investing in it is than $10,000 dollars. What is the maximum that the investor should be willing to pay for the option? Enter your answer in dollars. For example, an answer of $200 thousands should be entered as 200,000. EVSI = $

A real estate investor has the opportunity to purchase land currently zoned as residential. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table: State of Nature Rezoning Approved Rezoning Not Approved Decision Alternative s1 s2 Purchase, d1 610 -190 Do not purchase, d2 0 0 (a) If the probability that the rezoning will be approved is 0.5, what decision is recommended? Recommended Decision: What is the expected profit? Enter your answer in dollars. For example, an answer of $200 thousands should be entered as 200,000. $ (b) The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning proposal from area residents. Probabilities are as follows: Let H = High resistance to rezoning L = Low resistance to rezoning P(H) = 0.55 P(s1 | H) = 0.18 P(s2 | H) = 0.82 P(L) = 0.45 P(s1 | L) = 0.87 P(s2 | L) = 0.13 What is the optimal decision strategy if the investor uses the option period to learn more about the resistance from area residents before making the purchase decision? High resistance: Low resistance: (c) If the option will cost the investor an additional $10,000, should the investor purchase the option? The investor purchase this option, as the payoff of the investing in it is than $10,000 dollars. What is the maximum that the investor should be willing to pay for the option? Enter your answer in dollars. For example, an answer of $200 thousands should be entered as 200,000. EVSI = $

A First Course in Probability (10th Edition)

10th Edition

ISBN:9780134753119

Author:Sheldon Ross

Publisher:Sheldon Ross

Chapter1: Combinatorial Analysis

Section: Chapter Questions

Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...

See similar textbooks

Related questions

Question

	State of Nature
	Rezoning Approved	Rezoning Not Approved
Decision Alternative	s₁	s₂
Purchase, d₁	610	-190
Do not purchase, d₂	0	0

(a)

If the probability that the rezoning will be approved is 0.5, what decision is recommended?

Recommended Decision:

What is the expected profit? Enter your answer in dollars. For example, an answer of $200 thousands should be entered as 200,000.

(b)

The investor can purchase an option to buy the land. Under the option, the investor maintains the rights to purchase the land anytime during the next three months while learning more about possible resistance to the rezoning proposal from area residents. Probabilities are as follows:

Let H = High resistance to rezoning

L = Low resistance to rezoning

P(H) = 0.55 P(s₁ | H) = 0.18 P(s₂ | H) = 0.82

P(L) = 0.45 P(s₁ | L) = 0.87 P(s₂ | L) = 0.13

What is the optimal decision strategy if the investor uses the option period to learn more about the resistance from area residents before making the purchase decision?

High resistance:
Low resistance:

(c)

If the option will cost the investor an additional $10,000, should the investor purchase the option?

The investor purchase this option, as the payoff of the investing in it is than $10,000 dollars.

What is the maximum that the investor should be willing to pay for the option? Enter your answer in dollars. For example, an answer of $200 thousands should be entered as 200,000.

EVSI = $

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 3 images

SEE SOLUTION Check out a sample Q&A here