Statement of a problem № m1331


Jerry Smith (see Problem 3-38) has done some analysis about the profitability of the bicycle shop. If Jerry builds the large bicycle shop, he will earn $ 60,000 if the market is favorable, but he will lose $ 40,000 if the market is unfavorable. The small shop will return a $ 30,000 profit in a favorable market and a $ 10,000 loss in an unfavorable market. At the present time, he believes that there is a 50–50 chance that the market will be favorable. His old marketing professor will charge him $ 5,000 for the marketing research. It is estimated that there is a 0.6 probability that the survey will be favorable. Furthermore, there is a 0.9 probability that the market will be favorable given a favorable outcome from the study. However, the marketing professor has warned Jerry that there is only a probability of 0.12 of a favorable market if the marketing research results are not favorable. Jerry is confused. (a) Should Jerry use the marketing research? (b) Jerry, however, is unsure the 0.6 probability of a favorable marketing research study is correct. How sensitive is Jerry’s decision to this probability value? How far can this probability value deviate from 0.6 without causing Jerry to change his decision? In Problem 3-38, Jerry Smith is thinking about opening a bicycle shop in his hometown. Jerry loves to take his own bike on 50-mile trips with his friends, but he believes that any small business should be started only if there is a good chance of making a profit. Jerr

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