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4) (30 points) You are currently running a successful small business: a retail bagel shop in Salt Lake City. You are contemplating making an expansion in Boulder, CO. Here are the facts: Expansion would cost you $1M up front; you have this money in the bank o This figure includes the cost of hiring someone to oversee everything in CO; your existing business will not be impacted at all . If you enter this market, your projections are: 60% chance that your bagels become a hit: you will generate $2M in value 25% chance of moderate success: you generate $600k in value 10% chance no one buys a single bagel from your store: you generate $0 in value O 5% chance you irritate the Downtown Merchants of Boulder Association enough that they pull political strings to get you shut down and fined for heath code violations. You will sell nothing ($0 value generated), and the fine will be $100k. Ignore taxes or any other issues not explicitly outlined in the problem Questions: a) Should you pursue this expansion? What is the expected value of choosing to open the Boulder store? b) Assume the store in Salt Lake City actually isn't doing that well. If you spend the $1M to expand, you cannot subsequently afford to take a $100k hit - it would cause you to lose the business, and that's an unacceptable outcome for you. What is the fair cost for an insurance contract that pays you $100k in the outcome that your Boulder store gets shut down and fined? c) If expanding to Boulder will distract you from focusing on your existing store, causing you to sell fewe bagels in SLC, should this be included in a calculation of economic profit for the expansion? Why or why not? d) A market research firm in Boulder offers to conduct an extensive survey about bagel demand. If you pay them $60k, they will tell you with certainty which of the four possible outcomes will happen (now; before you launch). Should you hire them? What is the EV of expansion if you do hire them? (Note: this one is a little tricky; if you are short on time, you may want to leave for last or skip.) -remainder of page purposefully left blank