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eBook Problem 4-21 (Algorithmic) A real estate investor has the opportunity to purchase land currently zoned 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 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 tabli Decision Alternative Purchase, d Do not purchase, d₂ Rezoning Approved S₁ 650 What is the expected profit? State of Nature 0 Rezoning Not Approved S₂ -220 0 a. If the probability that the rezoning will be approved is 0.5, what decision is recommended? Recommended decision: Expected profit: $ 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 prope from area residents. Probabilities are as follows: Let H- High resistance to rezoning L Low resistance to rezoning P(H) 0.49 P(S₁ | H)-0.14 P(S2 | H) 0.86 P(S2 | L) 0.15 P(L)-0.51 P(S₁ IL)-0.85 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: If the antion will cost the invector an additional $10.000 should the investor nurchase the antion? Previous Next

eBook Problem 4-21 (Algorithmic) A real estate investor has the opportunity to purchase land currently zoned 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 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 tabli Decision Alternative Purchase, d Do not purchase, d₂ Rezoning Approved S₁ 650 What is the expected profit? State of Nature 0 Rezoning Not Approved S₂ -220 0 a. If the probability that the rezoning will be approved is 0.5, what decision is recommended? Recommended decision: Expected profit: $ 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 prope from area residents. Probabilities are as follows: Let H- High resistance to rezoning L Low resistance to rezoning P(H) 0.49 P(S₁ | H)-0.14 P(S2 | H) 0.86 P(S2 | L) 0.15 P(L)-0.51 P(S₁ IL)-0.85 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: If the antion will cost the invector an additional $10.000 should the investor nurchase the antion? Previous Next

A First Course in Probability (10th Edition)
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...
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eBook Problem 4-21 (Algorithmic) A real estate investor has the opportunity to purchase land currently zoned 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: Decision Alternative Purchase, d Do not purchase, d₂ Rezoning Approved S₁ 650 What is the expected profit? Low resistance: State of Nature 0 Rezoning Not Approved S₂ a. If the probability that the rezoning will be approved is 0.5, what decision is recommended? Recommended decision: -220 0 Expected profit: $ 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(S₁ | H)-0.14 P(H) 0.49 P(S2 | H) P(S2 | L) 0.86 0.15 P(L) = 0.51 P(S1 | L) 0.85 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: If the antion will cost the invector an additional $10.000 should the investor nurchase the antion? Previous Next >
Transcribed Image Text:eBook Problem 4-21 (Algorithmic) A real estate investor has the opportunity to purchase land currently zoned 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: Decision Alternative Purchase, d Do not purchase, d₂ Rezoning Approved S₁ 650 What is the expected profit? Low resistance: State of Nature 0 Rezoning Not Approved S₂ a. If the probability that the rezoning will be approved is 0.5, what decision is recommended? Recommended decision: -220 0 Expected profit: $ 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(S₁ | H)-0.14 P(H) 0.49 P(S2 | H) P(S2 | L) 0.86 0.15 P(L) = 0.51 P(S1 | L) 0.85 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: If the antion will cost the invector an additional $10.000 should the investor nurchase the antion? Previous Next >
Recommended decision: What is the expected profit? Expected profit: $ 11111 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 proposa from area residents. Probabilities are as follows: P(H) = 0.49 P(L) = 0.51 Low resistance: Let H- High resistance to rezoning L Low resistance to rezoning P(S₁ | H) = 0.14 P(S₁ | L) 0.85 P(S2 | H) P(S₂ | L) = 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: 0.86 0.15 EVSI: $ c. If the option will cost the investor an additional $10,000, should the investor purchase the option? Why or why not? The input in the box below will not be graded, but may be reviewed and considered by your instructor. What is the maximum that the investor should be willing to pay for the option? Previous Next > C
Transcribed Image Text:Recommended decision: What is the expected profit? Expected profit: $ 11111 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 proposa from area residents. Probabilities are as follows: P(H) = 0.49 P(L) = 0.51 Low resistance: Let H- High resistance to rezoning L Low resistance to rezoning P(S₁ | H) = 0.14 P(S₁ | L) 0.85 P(S2 | H) P(S₂ | L) = 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: 0.86 0.15 EVSI: $ c. If the option will cost the investor an additional $10,000, should the investor purchase the option? Why or why not? The input in the box below will not be graded, but may be reviewed and considered by your instructor. What is the maximum that the investor should be willing to pay for the option? Previous Next > C
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