Bill Holliday is not sure what he should do. He can build a
quadplex (i.e., a building with four apartments), build a duplex,
gather additional information, or simply do nothing. If he gathers
additional information, the results could be either favorable or
unfavorable, but it would cost him $3,000 to gather the
information. • Bill believes that there is a 50-50 chance that the
information will be favorable. • If the rental market is favorable,
Bill will earn $15,000 with the quadplex or $5,000 with the duplex.
Bill doesn’t have the financial resources to do both. • With an
unfavorable rental market, however, Bill could lose $20,000 with
the quadplex or $10,000 with the duplex.
Without gathering additional information, Bill estimates that the probability of a favorable rental market is 0.7. A favorable report from the study would increase the probability of a favorable rental market to 0.9. Furthermore, an unfavorable report from the additional information would decrease the probability of a favorable rental market to 0.4. Of course, Bill could forget all of these numbers and do nothing. What is your advice to Bill?
Without gathering additional information, Bill estimates that the probability of a favorable rental market is 0.7. A favorable report from the study would increase the probability of a favorable rental market to 0.9. Furthermore, an unfavorable report from the additional information would decrease the probability of a favorable rental market to 0.4. Of course, Bill could forget all of these numbers and do nothing. What is your advice to Bill?
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