Problem: A REAL ESTATE INVESTOR HAS THE OPPRTUNITY TO PURCHASE LAND CURRENTLY ZO

Question

Problem:

A REAL ESTATE INVESTOR HAS THE OPPRTUNITY TO PURCHASE LAND CURRENTLY ZONED RESIDENTIAL. If the county board approves a request to rezone the property as commercial within the next year, the investor will be able to lease the land to a large discount firm that wants to open a new store on the property. However, if the zoning change is not approved, the investor will have to sell the property at a loss. Profits (in thousands of dollars) are shown in the following payoff table:

State of Nature

         Rezoning Approved (s1)   Rezoning Not Approved (s2)

Decision Alternative

Purchase, d1    600 -200

Do not purchase, d2    0 0

If the probability that the rezoning will be approved is 0.40, what decision is recommended? What is the expected profit?

Explanation / Answer

Here we are given that P( Rezoning Approved ) = 0.4, therefore P( Rezoning Not Approved ) = 1 - 0.4 = 0.6

Expected value of the decisions is computed as:

Therefore as the expected payoff for the decision to purchase is more, purchase decisions should be made.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.