he city of Belgrade, Serbia, is contemplating building a second airport to relieve congestion at the main airport and is considering two potential sites, X and Y. Hard Rock Hotels would like to purchase land to build a hotel at the new airport. The value of land has been rising in anticipation and is expected to skyrocket once the city decides between sites X and Y. Consequently, Hard Rock would like to purchase land now. Hard Rock will sell the land if the city chooses not to locate the airport nearby. Hard Rock has four choices: (1) buy land at X, (2) buy land at Y, (3) buy land at both X and Y, or (4) do nothing. Hard Rock has collected the following data (which are in millions of euros): X Y Current purchase price 26 22 Profits if airport and hotel built at this site 50 40 Sale price if airport not built at this sit 11 5 Hard Rock determines there is a 55% chance the airport will be built at X (hence
The city of Belgrade, Serbia, is contemplating building a second airport to relieve congestion at the main airport and is considering two potential sites, X and Y. Hard Rock Hotels would like to purchase land to build a hotel at the new airport. The value of land has been rising in anticipation and is expected to skyrocket once the city decides between sites X and Y. Consequently, Hard Rock would like to purchase land now. Hard Rock will sell the land if the city chooses not to locate the airport nearby. Hard Rock has four choices: (1) buy land at X, (2) buy land at Y, (3) buy land at both X and Y, or (4) do nothing. Hard Rock has collected the following data (which are in millions of euros):
X Y
Current purchase price 26 22
Profits if airport and hotel built at this site 50 40
Sale price if airport not built at this sit 11 5
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States of Nature
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Alternatives
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airport at X
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airport at Y
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buy land at X
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______ | _____ |
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buy land at Y
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_____ | _____ |
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buy land at both X and Y
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_____ | _____ |
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do nothing
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0 | 0 |
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Probability
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0.55
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0.45
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B) Waht should Hard Rock decide to do to maximize total net profit?
The best alternative is ________ with a total net profit of ______ million euros(round your response to one decimal place)
The payoff at the airport X is shown below
The Payoff to buy land at X=Profit of an airport built at site X- Current purchase at site X = 50-26
= 14
The Payoff to buy land at Y = Sale price at Y- Current purchase at site Y
= 5-22
= -17
Payoff to buy land at X and Y = The Payoff to buy land at X+The Payoff to buy land at Y
= 14+(-17)
= -3
Payoff to do nothing = 0
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