Mr. Denmark is thinking about either building a quadplex (a building with four apartments), building a duplex, or simply doing nothing. Mr. Denmark is also thinking about hiring his old
marketing professor to conduct a marketing research study. If the study is conducted, the study
could be positive or negative, but it would cost him $3,000. Mr. Denmark believes that there
is a 50–50 chance that the information will be positive. If the rental market is favorable, he
will earn $15,000 with the quadplex or $5,000 with the duplex. He doesn’t have the financial
resources to do both. With an unfavorable rental market, however, Mr. Denmark could lose
$20,000 with the quadplex or $10,000 with the duplex. Without conducting the market
research study, Mr. Denmark estimates that the probability of a favorable rental market is 0.6.
Based on historical data, there is a 0.8 probability that the marketing research will be positive
given a favorable rental market. Moreover, there is a 0.7 probability that the marketing
research will be negative given an unfavorable rental market. Of course, Mr. Denmark could
forget all of these numbers and do nothing.