1.4 The EZ Construction Company is offered a

$20,000 contract to build a new deck for a house.

The company’s profit if they do not have to sink piers (vertical supports) down to bedrock will be

$4,000. However, if they have to sink the piers, they exeRCISeS

 = exercise is available on MyEconLab; * = answer appears at the back of this book; m = mathematical problem.

will lose $1,000. The probability they will have to put in the piers is 25%. What is the expected value of this contract? Now, EZ learns that it can obtain a seismic study of the property that would specify whether piers have to be sunk before EZ must accept or reject this contract. By how much would the seismic study increase EZ’s expected value?

What is the most that it will pay for such a study?

(Hint: See Solved Problem 16.1.) m