erry Young is considering opening a bicycle shop in his hometown. Jerry can open

Question

erry Young is considering opening a bicycle shop in his hometown. Jerry can open a small shop, a large shop, or no shop at all. Because there will be a five-year lease on the building that Jerry is thinking about using, he wants to make sure that he makes the correct decision. If Jerry 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. Jerry’s old marketing professor will charge him $5,000 for a marketing survey. It is estimated that there is a 0.6 probability that the survey will be favorable. Furthermore, there is a 0.9 probability that the marker will be favorable if the outcome of the survey is favorable. However, the marketing professor has warned Jerry that there is only a 0.12 probability of a favorable market if the marketing research results are not favorable. If the survey is conducted and the results are unfavorable, what is the payoff?

Explanation / Answer

Given P(favourable)=0.6, P(favourable Market|Favourable)=0.9

P(Favourable Market|Unfavourable)=0.12

Given that the results were unfavourable

Payoff of Large shop=-5000+0.12*60000+0.88*(-40000)=-33000

Payoff of Small Shop=-5000+0.12*30000+.88*(-10000)=-10200

If he does nothing->Payoff=-5000

Hence if he wants to be on the safe side,He should not open the shop

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