You are thinking of opening a pizza-parlor after graduation. You anticipate having to spend $4500 in fixed cost to start up the pizza-parlor. Your preliminary market research indicates that the there is a 60% chance that the market is high-end and will result in you obtaining a profit of $6000. With the remaining 40%, the market will be relatively low-end and will result obtaining a profit of only $3000. [the profits do not account for the $4500 fixed-cost that you incur when you start the business]

a. What is the expected value if you start the pizza-parlor (1 pt)

Your friend is running a market research firm. She suggests that you pay the market research firm a fee of $500 and have them find out the true market potential before you start the business.

b. If you follow this approach (i.e., pay the market research firm $500 for their services, and start the firm only if the market is really high-end), what is your new expected value? (2.5 pts)

c. Should you employ the market research firm? (0.5 pt)

d. How would your answers to (a) and (b) change if the likelihood that the market is high-end is 70% (instead of 60%)? (1+1.5= 2.5 pts)

e. Should you employ the market research firm if the likelihood that the market is high-end is 70%? (0.5 pt)