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Statistics Case Study

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AB103 Statistical & Quantitative Methods
Semester 2 of 2009/2010

Problem Context:
This case problem is related to a property purchase strategy. The president of Oceanview is deciding whether to bid for a property to build and sell condominiums. However, this depends on whether the state can change the zoning of the property to permit construction of condominiums. Here, the decision is whether to bid for the property, and chance events are firstly, whether the bid can be successful, and secondly, whether the state will approve the zoning change. To assess the likelihood that the state will approve the zoning change, the president can hire a market research service. Hence, the president is facing another decision as …show more content…

Hence, Oceanview should submit the bid. 3. If market research is conducted and it predicts that the zoning change will be rejected, the expected value of submitting the bid would be a loss of $-0.075 million, whereas the payoff of not submitting the bid would be 0. Hence, to minimize losses, Oceanview should not submit the bid.
The expected value of conducting the market research is $0.093 million, and the expected value of not conducting the research is $0.05 million. Hence, the value of information provided by the research is $0.043 million. This is much larger than the cost of hiring the service ($0.015 million), hence Oceanview should employ the market research firm.
Insights
The above analysis is using the expected value approach for decision making. However, to gain a complete picture of the situation, we should also look at the risk associated with each of the decision. For recommendation (1), although it shows an expected profit of $0.05 million, the risk associated with such a profit is also high as reflected in the standard deviation of $0.1 million. The risk per unit return is 2, and this shows that the decision of bidding when no research is available is quite risky. For recommendation (2), the standard deviation is $0.46 million, and the risk per unit return is still 2. This proves that even when there is market research to improve the expected value of the payoff, there

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