Bill Holliday is not sure what she should do. He can either build a quadplex (i.e.

, a building with
four apartments), build a duplex, gather additional information, or simply do nothing. If he
gathers additional information, the results could be either favorable or unfavorable, but it
would cost him $3,000 to gather the information. Bill believes that there is a 5050chance that
the information will be favorable. If the Rental market is favorable, Bill will earn $15,000 With
the quadplex or $5,000 with the duplex. Bill doesnt have the financial resources to do both.
With an unfavorable rental market, however, Bill could Lose $20,000 with the quadplex or
$10,000 with the duplex. Without gathering additional information, Bill estimates that the
probability of a favorable rental market is 0.7. A favorable report from the study would
increase the probability of a favorable rental market to 0.9. Furthermore, an unfavorable
report from the additional information would decrease the probability of a favorable rental
market to 0.4. Of course, Bill could forget all of these numbers and do nothing. What is your
advice to Bill?

Answer :
EMV (Rude 2) = 15000 (0.7) + (-20000) 0.3 = 4500
EMV (Rude 3) = 5000 (0.7) + (-10000) 0.3 = 500
EMV (Rude 4) = 12000 (0.9) + (-23000) 0.1 = 8500
EMV (Rude 5) = 2000 (0.9) + (-13000) 0.3 = -2100
EMV (Rude 6) = 12000 (0.6) + (-23000) 0.4 = -2000
EMV (Rude 7) = 2000 (0.6) + (-13000) 0.4 = -4000
EMV (Rude 1) = 8500 (0.5) + (-3000) 0.5 = 2750
 (0.7) Market
$15000
Favorable
2
(Quadplex)
(0.3) Market
$-12000
Unfavorable

(0.7) Market
$5000
B Favorable
(Do Not Conduct) 3
(Duplex)
(0.3) Market
$-10000
Unfavorable

No Facility $0

(0.9) Market
$12000
Favorable
4
(Quadplex)
(0.1) Market
$-10000
Unfavorable

(0.9) Market
$2000
A Favorable
C
(Conduct Study) 5
(Duplex)
(0.1) Market
$-13000
Unfavorable

No Facility $3000

(0.6) Market
$12000
Favorable
6
(Quadplex)
(0.4) Market
$-23000
Unfavorable

(0.6) Market
$12000
Favorable
D
7
(Duplex)
(0.4) Market
$-13000
Unfavorable

No Facility $-3000
Mark Martinko has been a class A racquetball player for the past five years, and one of his biggest
goals is to own and operate a racquetball facility. Unfortunately, Marks thinks that the chance
of a successful racquetball facility is only 30%. Marks lawyer has recommended that he
employ one of the local marketing research groups to conduct a survey concerning the success
or failure of a racquetball facility. There is A 0.8 probability that the research will be favorable
Given a successful racquetball facility. In addition, There is a 0.7 probability that the research
will be unfavorable given an unsuccessful facility. Compute Revised probabilities of a successful
racquetball facility given a favorable and given an unfavorable survey.

Answer :

P (SF) = 0.3
P (RFSF) = 0.8
P (RUUF) = 0.8

P (UF) = 1 - P (SF) = 0.7

P (RUSF) = 1 - P (RFSF) = 0.2
P (RFUF) = 1 - P (PUUF) = 0.3

P ( RF|SF ) P( SF)
P (SFRF) =
P ( RF|SF ) P ( SF )+ P ( RU |UF ) P(UF )
0.8 0.3
=
0.8 0.3+0.3 0.7
= 0.53

Conditional Poskrior
State of Name Prior Probability Joint Probability
Probability Probability
Favorable Market 0.8 0.3 0.24 0.53
Non Favorable
0.3 0.7 0.21 0.47
Market
Total 0.45

So the probabiity of a success full driving range given a favorably research 0.53 and 0.47