Following is the payoff table for the Pittsburgh Development Corporation (PDC) Condominium Project. Amounts are in millions of dollars. State of Nature Decision Alternative Strong Demand S1 Weak Demand S2 Small complex, d1 8 7 Medium complex, d2 14 5 Large complex, d3 20 -9 Suppose PDC is optimistic about the potential for the luxury high-rise condominium complex and that this optimism leads to an initial subjective probability assessment of 0.8 that demand will be strong (S1) and a corresponding probability of 0.2 that demand will be weak (S2). Assume the decision alternative to build the large condominium complex was found to be optimal using the expected value approach. Also, a sensitivity analysis was conducted for the payoffs associated with this decision alternative. It was found that the large complex remained optimal as long as the payoff for the strong demand was greater than or equal to $17.5 million and as long as the payoff for the weak demand was greater than or equal to -$19 million. Consider the small complex decision. How much could the payoff under strong demand increase and still keep decision alternative d3the optimal solution? If required, round your answer to two decimal places. The payoff for the small complex under strong demand remains less than or equal to $ million, the large complex remains the best decision.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Following is the payoff table for the Pittsburgh Development Corporation (PDC) Condominium Project. Amounts are in millions of dollars.

	State of Nature
Decision Alternative	Strong Demand S1	Weak Demand S2
Small complex, d1	8	7
Medium complex, d2	14	5
Large complex, d3	20	-9

Suppose PDC is optimistic about the potential for the luxury high-rise condominium complex and that this optimism leads to an initial subjective probability assessment of 0.8 that demand will be strong (S₁) and a corresponding probability of 0.2 that demand will be weak (S₂). Assume the decision alternative to build the large condominium complex was found to be optimal using the expected value approach. Also, a sensitivity analysis was conducted for the payoffs associated with this decision alternative. It was found that the large complex remained optimal as long as the payoff for the strong demand was greater than or equal to $17.5 million and as long as the payoff for the weak demand was greater than or equal to -$19 million.

Consider the small complex decision. How much could the payoff under strong demand increase and still keep decision alternative d₃the optimal solution? If required, round your answer to two decimal places.

The payoff for the small complex under strong demand remains less than or equal to $ million, the large complex remains the best decision.

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