9) Mark M. Upp has just been fired as the university bookstore manager for setti
ID: 3183546 • Letter: 9
Question
9) Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested 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 at either site. He believes that there is a 50 percent chance that demand will be high. A market research study will cost $5,000. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable. (a) Should Mark use the study? Why? (b) If the study is done and the results are favorable, what would Mark's expected profit be? 9) Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested 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 at either site. He believes that there is a 50 percent chance that demand will be high. A market research study will cost $5,000. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable. (a) Should Mark use the study? Why? (b) If the study is done and the results are favorable, what would Mark's expected profit be? 9) Mark M. Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested 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 at either site. He believes that there is a 50 percent chance that demand will be high. A market research study will cost $5,000. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable. (a) Should Mark use the study? Why? (b) If the study is done and the results are favorable, what would Mark's expected profit be?Explanation / Answer
Site 1 :
Expected profit = 1/2 * 50000 - 1/2* 10000 = 20000
Site 2 Expected profit = 1/2 (80000 - 30000) = 25000
P( Good demand/Favorable study ) = 0.8
P( Favorable study) = 0.6
He will open the shop in the larger store now.
Site 2 Expected payoff = 0.8* 80000 - 0.2* 30000 = 58000
Site 1 expected payoff = 0.8 *50000 - 0.2*10000 = 38000
He will open the shop in the larger store now.
Net payoff of this option = 58000-5000(cost of study) = 53000
P( Good demand/unFavorable study ) = 0.1
P( unFavorable study) = 0.4
In case of unfavorable study , he will avoid opening the shop
Expected payoff = - 5000 in this case
So, total expected payoff after doing the study = 0.6 * 53000 - 0.4*5000 = 31800 -2000 = 29800
Since 29800 is greater than the best payoff of 25000 we had earlier, he should go for the study
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