Residents of Mill River have fond memories of ice skating at a local park. An ar

Question

Residents of Mill River have fond memories of ice skating at a local park. An artist has captured the experience in a drawing and is hoping to reproduce it and sell framed copies to current and former residents. He thinks that if the market is good he can sell 400 copies of the elegant version at $125 each. If the market is not good, he will sell only 300 at $90 each. He can make a deluxe version of the same drawing instead. He feels that if the market is good he can sell 500 copies of the deluxe version at $100 each. If the market is not good, he will sell only 400 copies at $70 each. In either case, production costs will be approximately $35,000. He can also choose to do nothing, if he believes there is a 50% probability of a good market, what should he do and why?

Explanation / Answer

Do nothing?
Yes - no cost no profit
NO - deluxe or Elegant?
Deluxe: good or not?
Good Market Deluxe give a profit of $(500 x100 - 35000) = $15,000
Not Good with Deluxe profit is $(400 x 70 - 35000) = -$7,000
Elegant: Delux or not?
Good market Elegant profit of $(400 x 125 -35,000) = $15,000
Not good market Elegant profit $(300 x 90 - 35000) = - $8,000
So if not good deluxe gives a smaller loss than Elegant and if market is good they both give same profit.
So don't want to do Elegant option!
So for Deluxe option, as chances of a good market are 50%, chance of not good market is also 50%. So likely profit is 0.5 x $15,000 - 0.5 x $7,000 = $(7500 -3500) = $4000
So doing nothing costs nothing but the Deluxe option is a cost of $35,000 but a likely profit of $4000.

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