John Smith, owner of a small service company, currently operates in the downtown

Question

John Smith, owner of a small service company, currently operates in the downtown area, is considering a move to a newly developed city mall. Smith thinks that if he moves there will be three probabilities for his business, decline, stable, and increase (see the information below). Further, the city with a federal stimulus money is considering a downtown revitalization with a new plaza in near Smith's store. If it does, Smith estimates his business should increase (see the information below). If the plaza is not built, Smith thinks his downtown business will decline (see the information below). The following information is available: If the plaza is built, his business will increase $120,000 with a probability of 0.65; if the plaza is not built, his business will decrease $10,000. There would be three general economic conditions: decline with a probability of 0.40, he will lose $80,000; stable with a probability of 0.30, he will lose $30,000; or increase, he will gain $20,000. Answer the following questions. You may have more than one choice.

a. if the plaza is built and if general economic conditions increase, his moving in will result in gaining $40,000.

b. if the plaza is not built and if general economic conditions decline, his moving in will result in losing $90,000.

c. if the plaza is built and if general economic conditions decline, the joint probability is 0.36.

d. if the plaza is built and if general economic conditions stable, the joint probability is 0.17.

e. if the plaza is not built and if general economic conditions stable, the joint probability is 0.14.

f. if the plaza is not built and if general economic conditions increase, the joint probability is 17.

g. if the plaza is built and if general economic conditions increase, the payoff is $29,620.

h. if the plaza is not built and if general economic conditions decline, the payoff is ($16,200).

i. if the plaza is built, the expected monetary value is $46,750.

j. if the plaza is not built, the expected monetary value is $17,550.

Explanation / Answer

Answer:

part (a) is not correct.

part (b) is correct, because if the plaza is not built his business will lose $ 10,000 and the economic conditions decline then further he will have lose of $ 80,000.Means total loss will be $ 90,000

part (c) if the plaza is built and if general economic conditions decline, the joint probability is 0.36 is not correct as the joint probability would be 0.65 X 0.40 = 0.26

part (d) is not coorect. if the plaza is built and if general economic conditions stable, the joint probability is 0.17.

As the right answer is 0.65 X 0.30 = 0.195

part (e) is not correct if the plaza is not built and if general economic conditions stable, the joint probability is 0.14.

As the right answer is 0.35 X 0.30 = 0.105

part (f) if the plaza is not built and if general economic conditions increase, the joint probability is 17. is incorrect.

part (g) if the plaza is built and if general economic conditions increase, the payoff is $29,620. it is incorrect.

part (h) if the plaza is not built and if general economic conditions decline, the payoff is ($16,200). wrong

part (i) if the plaza is built, the expected monetary value is $46,750. wrong

part (j) if the plaza is not built, the expected monetary value is $17,550.

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