The city of Belgrade, Serbia, is contemplating building a second airport to reli
ID: 3048783 • Letter: T
Question
The city of Belgrade, Serbia, is contemplating building a second airport to relieve congestion at the main airport and is considering two potential sites, X and Y. Hard Rock Hotels would like to purchase land to build a hotel at the new airport. The value of land has been rising in anticipation and is expected to skyrocket once the city decides between sites X and Y. Consequently, Hard Rock would like to purchase land now. Hard Rock will sell the land if the city chooses not to locate the airport nearby. Hard Rock has four choices: (1) buy land at X, (2) buy land at Y, (3) buy land at both X and Y, or (4) do nothing. Hard Rock has collected the following data (which are in millions of euros):
Site X
Site Y
Current purchase price
2929
1818
Profits if airport and hotel built at this site
4040
3030
Sale price if airport not built at this site
1212
55
Hard Rock determines there is a 60% chance the airport will be built at X (hence, a 40% chance it will be built at Y).
a) Set up the decision table (in millions of euros) (enter your responses as whole numbers and include a minus sign if
necessary).
States of Nature
Alternatives
airport at X
airport at Y
buy land at X
buy land at Y
buy land at both X and Y
do nothing
Probability
0.60
0.40
P.S. I know you have to make a decision tree but I'm not sure how to get the numbers, so if you can elaborate more on that part that would be great (:
Site X
Site Y
Current purchase price
2929
1818
Profits if airport and hotel built at this site
4040
3030
Sale price if airport not built at this site
1212
55
Explanation / Answer
Given, airport at X
Payoff of buy land at X = Profits of airport built at site X - Current purchase price at site X = 4040 - 2929 = 1111
Payoff of buy land at Y = Sale price at site Y - Current purchase price at site Y = 55 - 1818 = -1763
Payoff of buy land at both X and Y = (Profits of airport built at site X - Current purchase price at site X) + (Sale price at site Y - Current purchase price at site Y) = 1111 -1763 = -652
Payoff of do nothing = 0
Given, airport at Y
Payoff of buy land at X = Sale price at site X - Current purchase price at site X= 1212 - 2929 = -1717
Payoff of buy land at Y = Profits of airport built at site Y - Current purchase price at site Y = 3030 - 1818 = 1212
Payoff of buy land at both X and Y = (Profits of airport built at site Y - Current purchase price at site Y) + (Sale price at site X - Current purchase price at site X) = 1212 -1717 = -505
Payoff of do nothing = 0
Alternatives airport at X airport at Y buy land at X 1111 -1717 buy land at Y -1763 1212 buy land at both X and Y -652 -505 do nothing 0 0 Probability 0.60 0.40Related Questions
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