a. A city is considering airport expansion. In particular, the mayor and city council are trying to decide whether to sell bonds to construct a new terminal. The problem is that at present demand for gates is not strong enough to warrant construction of a new terminal. However, a major airline is investigating several cities to determine which it will choose for its new headquarters. If this city is selected, the new terminal will easily pay for itself. The decision to build the terminal must be made by the city before the airline will say whether the city has been chosen. Shown here is a decision table for this dilemma. Use this information to compute EMVs for the alternatives and reach a conclusion.

b. An airline industry expert indicates that she will sell the city decision-makers her best guess as to whether the city will be chosen. The probabilities of her being right or wrong are given. Use these probabilities to revise the prior probabilities of the city being chosen as the hub. Compute the EMV using the sample information and then determine the value of this sample information.

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Decision Alternative Build Terminal Don't Build Terminal State of Nature City Chosen (0.20) $12,000 -$1,000 City Not Chosen (0.80) -$8,000 $2,000