Bulloch County never has allowed liquor to be sold in restaurants. However, in t

Question

Bulloch County never has allowed liquor to be sold in restaurants. However, in three months, county residents are scheduled to vote on a referendum to allow liquor to be sold by the drink. Currently, polls indicate a 60% chance that the referendum will be passed by voters. Phil Jackson is a local real estate speculator who is eyeing a closed restaurant building that is scheduled to be sold at a sealed bid auction. Phil estimates that if he bids $ 1.25 million, there is a 25% chance he will obtain the property; if he bids $ 1.45 million, there is a 45% chance he will obtain the property; and if he bids $ 1.85 million, there is an 85% chance he will obtain the property. If he acquires the property and the referendum passes, Phil believes he could then sell the restaurant for $ 2.2 million. However, if the referendum fails, he believes he could sell the property for only $ 1.15 million. a. Develop a decision tree for this problem. b. What is the optimal decision according to the EMV criterion

Explanation / Answer

excel solution: Bid Chance of winning Bid*chance Return Prob of return Return * Prob Potential profit/Loss 1,250,000.00 25% 312,500.00 2,200,000.00 60% 1,320,000.00 1,007,500.00 1,150,000.00 40% 460,000.00 147,500.00 1,450,000.00 45% 652,500.00 2,200,000.00 60% 1,320,000.00 667,500.00 1,150,000.00 40% 460,000.00 (192,500.00) 1,850,000.00 85% 1,572,500.00 2,200,000.00 60% 1,320,000.00 (252,500.00) 1,150,000.00 40% 460,000.00 (1,112,500.00)

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