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A building company is offered two pieces of land for house building at 40,000 each. If the land does not suffer from subsidence (i.e. sinking),
A building company is offered two pieces of land for house building at 40,000 each. If the land does not suffer from subsidence (i.e. sinking), they would expect to make a net profit of 20,000 on each piece when a house is built on it. However, if there is subsidence, the land is only worth 4,000 so they would make a loss of 36,000 on each piece of land The building company believe that the chance that both pieces of land will suffer from subsidence is 0.2 , that one (and only one) will suffer is 0.3 ; and neither will suffer subsidence is 0.5 . They have to decide whether to buy the two pieces of land - or not. Alternatively, they could buy one, test it for subsidence, and then decide whether to buy the other piece of land. Assume that the test is a perfect predictor of subsidence and that it costs 400. 3a Draw a decision tree to show all possible outcomes. 3b What is the best action that the builder should take? 3c Provide reasons for why this is the best action
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