Mark has just been fired as the college bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of P50,000. If demand is low, he will lose 10,000. If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose P30,000 if demand is low. He also has the option of not opening at either site. He believes that there is a 50 percent chance that demand will be high. A market research study will cost $5,000. The probability of a good demand given a favorable study is 0.8. The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable. (a) Should Mark use the study? Why or why not? (b) If the study is done and the results are favorable, what would Mark's expected profit be?
Mark has just been fired as the college bookstore manager for setting prices too low (only 20 percent above suggested retail). He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation. There are two possible sites under consideration. One is relatively small, while the other is large. If he opens at Site 1 and demand is good, he will generate a profit of P50,000. If demand is low, he will lose 10,000. If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose P30,000 if demand is low. He also has the option of not opening at either site. He believes that there is a 50 percent chance that demand will be high. A
The probability of a good demand given an unfavorable study is 0.1. There is a 60 percent chance that the study will be favorable. (a) Should Mark use the study? Why or why not? (b) If the study is done and the results are favorable, what would Mark's expected profit be?
Step by step
Solved in 5 steps
