Mark M Upp has just been fired as the university bookstore m

Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggest retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of $50,000. If demand is low, he will lose $10,000. If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 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. Mark got lucky and received a free survey from a University. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.2. There is a 60 percent chance that the study will be favorable.

A)Draw a decision tree

B) Should Mark use the study? Why?

C) What is the maximum amount Mark should be willing to pay for this study?

Solution

Yes, he should use the study. His EMV with the study is $29,800 while the highest EMV without the study is $25,000.

Yes, he should use the study. His EMV with the study is $34,800 while the highest EMV without the study is $25,000. He should pay no more than $9,800 for this study. He should pay no more than $10,000 for a \"perfect\" study.