Bill Holliday isn't sure what he should do. He can build a four-apartment building, a two-apartment building, gather additional information, or simply do nothing. If he gathers additional information, the results could be favorable or unfavorable, but it would cost him $3,000 to gather it. Bill thinks there is a 50-50 chance that the information will be favorable. If the rental market is favorable, Bill will earn $15,000 with four apartments or $5,000 with two. He does not have the financial resources to pursue both options, but with an unfavorable rental market he would lose $20,000 with four apartments or $10,000 with two. Without gathering additional information, Bill estimates the probability of a favorable rental market to be 0.7. A favorable survey report would increase the probability of a favorable rental market to 0.9. Moreover, an unfavorable report of the additional information would decrease the probability of a favorable income market to 0.4. Of course, Bill can forget these numbers and not build. What would you advise Bill?

Bill Holliday isn't sure what he should do. He can build a four-apartment building, a two-apartment building, gather additional information, or simply do nothing. If he gathers additional information, the results could be favorable or unfavorable, but it would cost him $3,000 to gather it. Bill thinks there is a 50-50 chance that the information will be favorable. If the rental market is favorable, Bill will earn $15,000 with four apartments or $5,000 with two. He does not have the financial resources to pursue both options, but with an unfavorable rental market he would lose $20,000 with four apartments or $10,000 with two. Without gathering additional information, Bill estimates the probability of a favorable rental market to be 0.7. A favorable survey report would increase the probability of a favorable rental market to 0.9. Moreover, an unfavorable report of the additional information would decrease the probability of a favorable income market to 0.4. Of course, Bill can forget these numbers and not build. What would you advise Bill?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 30P

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