Some home builders in recent years are moving towards condominium/townhouse complexes because of the rising cost of
Question:
Some home builders in recent years are moving towards condominium/townhouse complexes because of the rising cost of detached homes. Spoon Inc. a new builder, must decide if to produce small, medium or large size complexes. The decision is complicated by the state of nature (demand for this type of housing), which can be quite unpredictable. Spoon Inc. consulted a financial analyst who constructed a payoff table (in thousands of dollars) to reflect the alternatives available to the builder:
Complex Size
Demand Large Medium Small
High 1720 1220 870
Moderate 920 1220 870 Low 800 770 870
The probabilities associated with each state of nature are as follows:
P (high) = P (H) = 0.30; P (moderate) = P (M) = 0.40; P (Low) = P (L) = 0.30
Required:
- What is the most the builder should pay for information about the state of nature? (4 marks)
- The builder plans to employ a team of consultants with the following track record to better predict the state of nature.
P(I1H) = 0.76 P(I1M) = 0.20 P(I1L) = 0.04
P(I2H) = 0.14 P(I2M) = 0.66 P(I2L) = 0.26
P(I3H) = 0.10 P(I3M) = 0.14 P(I3L) = 0.70
Where
I1 market research indicates high demand
I2 market research indicated medium demand
I3 market research indicates low demand.
Assuming that the consultant indicates a low demand for the product, revise the probabilities (to three decimal places) for high, moderate, and low demand. (4 marks)
- Does the prediction of a low demand by the consultant change the decision about plant size in part a? Show your calculations. (2 marks)
Marketing Research
ISBN: 9781119497639
13th Edition
Authors: V. Kumar, Robert P. Leone, David A. Aaker, George S. Day