Reference no: EM132483789 , Length: 3 pages
The owner of a small business has the right to have a retail stall at a large festival to be held during the summer.
She judges that this would either be a success or a failure and that the probability that it it is a success is 0.4. If the stall was a success, the net income from it would be $90,000. If the stall was a failure, there would be a net loss of $30,000 from it.
To help to make the decision, the owner could pay for market research. This would cost $5,000. The market research would either give a positive indication or a negative indication. The conditional probability that it gives a positive indication, given that the stall will actually be a positive, is 0.75.
The conditional probability that it gives a negative indication, given that the stall will actually be a failure, is 1/3. The owner has various options: Do nothing Go ahead without market research.
Pay for the market research. Sell her right to a stall for $10,000. If she pays for the market research then, depending on the outcome, she can: Do nothing more.
Go ahead. Sell her right to a stall. If the market research gave a positive indication the price would be $35,000. If the market research gave a negative indication the price would be only $3,000.
Required: Advise the owner on appropriate decision.
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