Question: Philip Musa can build either a large video rental section
Philip Musa can build either a large video rental section or a small one in his Birmingham drugstore. He can also gather additional information or simply do nothing. If he gathers additional information, the results could suggest either a favorable or an unfavorable market, but it would cost him $ 3,000 to gather the information. Musa believes that there is a 50– 50 chance that the information will be favorable. If the rental market is favorable, Musa will earn $ 15,000 with a large section or $ 5,000 with a small. With an unfavorable video- rental market, however, Musa could lose $ 20,000 with a large section or $ 10,000 with a small section. Without gathering additional information, Musa estimates that the probability of a favorable rental market is .7. A favorable report from the study would increase the probability of a favorable rental market to .9. Furthermore, an unfavorable report from the additional information would decrease the probability of a favorable rental market to .4. Of course, Musa could ignore these numbers and do nothing. What is your advice to Musa?
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