Question
Mr. B is considering opening a grocery store near the campus. There are two possible sites under consideration. If he opens at Site 1 (smaller
Mr. B is considering opening a grocery store near the campus. There are two possible sites under consideration. If he opens at Site 1 (smaller site) and demand is good, he will generate a profit of $25,000. If demand is low, he will lose $5,000. If he opens at Site 2 (larger site) and demand is high, he will generate a profit of $57,000, but he will lose $8,000 if demand is low. He also has the option of not opening either. He believes that there is a 50 percent chance that demand will be high.
Mr. B can purchase a market research study. The probability of a good demand given a favorable study is 0.85, and the probability of a good demand given an unfavorable study is 0.2. There is a 70 percent chance that the study will be favorable.
(a) What is the maximum amount he should be willing to pay for this study?
(b) What is the maximum amount he should pay for any study?
(You should show your work for full credit. Round your answers to two decimal points.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started