A building contractor is submitting an estimate to a potential customer for carrying out some construction work at the customer's premises. The builder reckons that if he offers to carry out the work for $150,000, there is a 0.2 probability that the customer will agree to the price, a 0.5 probability that a price of $120,000, would eventually be agreed upon, and a 0.3 probability that the customer will simply refuse the offer and give back the work to another builder. If the builder offers to carry out the work for $100,000, he reckons that there is a 0.3 probability that the customer will accept this price, a 0.6 probability that the customer will bargain so that a price of $80,000 will eventually be agreed, and a 0.1 probability that the customer will refuse the offer and take the work elsewhere. Determine which price the builder should quote in order to maximize the expected payment he receives from the customer.

Suppose that, after some questions, the builder is able to make the following statements:

(a) "I am indifferent between receiving $120,000 for certain or entering a lottery that will give me a 0.9 probability of winning $0."

(b) "I am indifferent between receiving $100,000 for certain or entering a lottery that will give me a 0.85 probability of winning $150,000 and a 0.15 probability of winning $0."

(c) "I am indifferent receiving $80,000 for certain or entering a lottery that will give me a 0.75 probability of winning $150,000 and a 0.25 probability of winning $0."

Sketch the builders utility function and comment on what it show.

In the light of the above statements , which price should the builder now quote to the customer and why?

Answer rating: 100% (QA)

From the given information According to the ... View the full answer