Brad Smith has done some analysis about the profitability of the bicycle shop. If Brad builds the large bicycle shop, he will earn $60,000 if the market is favorable, but he will lose $40,000 if the market is unfavorable. The small shop will return a $30,000 profit in a favorable market and a $10,000 loss in an unfavorable market. At the present time, he believes that there is a 50-50 chance that the market will be favorable. His former marketing professor will charge him $5,000 for the marketing research. Furthermore, there is a 0.9 probability that the market will be favorable given a favorable outcome from the study.
What is the highest Expected Monetary Value for Brad’s decision?
Answer:
Given,
E(favorable | large shop) = 60,000
E(unfavorable | large shop) = -40,000
E(favorable | small shop) = 30,000
E(unfavorable | small shop) = -10,000
Current expected value of the decision given that no market research is used:
Now if Market Resarch is used:
Therefore 20,000 is the required expected value of the decision here.
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