I have a business of flipping houses. The houses I sell are very similar to each
ID: 3271690 • Letter: I
Question
I have a business of flipping houses. The houses I sell are very similar to each other. I sell them for 100000 with probability 0.2, for 150000 with probability 0.5 and finally for 200000 with probability 0.3. The houses sell independently of each other, which means the market is stable. Also, let X_i denote the price at which the i-th house sells. Again, that price is random and follows the above described model. Buying such a house before it is renovated costs me 130000. Renovating it costs me 25000. I need to renovate it first, for getting the above described probabilities on the selling price. a) Calculate the expected selling price. b) If you have many such houses, because you have a big firm, how much do you make per house on average on the long run? c) If you had only one such house do you think it is worth it?Explanation / Answer
a) Expected selling price = 0.2x100,000 + 0.5x150,000 + 0.3x200,000
= $155,000
b) Cost per house = 130,000 + 25,000 = $155,000
On the long run, there wont be any profit or loss
c) If I had only one house, probability of making profit = 0.3
probability of loss = 0.2+0.5 = 0.7
So, it is not worth selling as the probability of making loss is more
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