Question 1

Keystone can only properly market a limited number of properties.They are trying to figure out which property they should select to add to their portfolio among four candidates (and in so doing, gain some insight into how to make such decisions in the future).There is some uncertainty as the selling price (and therefore commission/profit) depends on the state of the real estate market 6 months in the future.Based on their experience, Keystone has provided an estimate of selling prices for a "good" real estate market and a "bad" real estate market for the four candidate properties (see Table 1).

Table 1: Sales price (in millions of $)

Alternatives

Bad Market

Good Market

Property 1

2.1

3.7

Property 2

1.7

3.8

Property 3

2.8

2.6

Property 4

2.2

2.4

Even with these estimates, though, Keystone managers are unsure which property to choose.Keystone managers consider themselves to be optimistic about the future, but would like to consider a variety of ways to make this decision.When asked how likely they think it is that the market will be good, Keystone said "about a 75% chance".Keystone also mentioned that they are curious about "opportunity loss", but they have no idea what this means or how to incorporate it into their decision making process. Keystone noted that they could pay for market forecasts that will help predict good and bad markets, but they have not done so in the past. They would like some help deciding whether to purchase the forecasts and what they should pay for a forecast.

(Guiding questions: What are the expected values of each alternative? What property should Keystone add to their portfolio according to a variety of decision criteria? What is the expected value of each property if you have no forecast? What would the expected value be if you have a perfect forecast? What would be the value of such a forecast?)