Bill is considering opening a new bookstore near the university campus. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at small site and demand is good, he will generate a profit of $60,000. If demand is low, he will lose $20,000. If he opens at large site and demand is high he will generate a profit of $90,000, but he will lose $40,000 if demand is low. He also has decided that he will open at one of these sites. He believes that there is a 60 percent chance that demand will be high. He assigns the following utilities to the different profits: U(60,000) = ? U(-20,000) = 0.20 U(90,000) = 1 U(-40,000) = 0 For what value of utility for $60,000, will Bill be indifferent between the two alternatives? (Show all your work)

Bill is considering opening a new bookstore near the university campus. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at small site and demand is good, he will generate a profit of $60,000. If demand is low, he will lose $20,000. If he opens at large site and demand is high he will generate a profit of $90,000, but he will lose $40,000 if demand is low. He also has decided that he will open at one of these sites. He believes that there is a 60 percent chance that demand will be high. He assigns the following utilities to the different profits: U(60,000) = ? U(-20,000) = 0.20 U(90,000) = 1 U(-40,000) = 0 For what value of utility for $60,000, will Bill be indifferent between the two alternatives? (Show all your work)

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 10MC: You are considering entry into a market in which there is currently only one producer (incumbent)....

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