An investor is to purchase one of three types of real estate, as illustrated in Figure below. The investor must decide among an apartment building, an office building, and a warehouse. The future states of nature that will determine how much profit the investor will make are good economic conditions and poor economic conditions. The profits that will result from each decision in the event of each state of nature are shown in Table below: Assume that it is now possible to estimate a probability of 0.60 that good economic conditions will exist and a probability of .40 that poor economic conditions will exist.
Question 2
An investor is to purchase one of three types of real estate, as illustrated in
Figure below. The investor must decide among an apartment building, an
office building, and a warehouse. The future states of nature that will
determine how much profit the investor will make are good economic
conditions and poor economic conditions. The profits that will result from
each decision in the event of each state of nature are shown in Table below:
Assume that it is now possible to estimate a probability of 0.60 that good
economic conditions will exist and a probability of .40 that poor economic
conditions will exist.
a) Determine the best decision by using expected opportunity loss.
b) Develop a decision tree, with expected values at the probability nodes.
c) Compute the expected value of perfect information.
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