3.31 Mas Asmyra has done some analysis about the profitability of the bicycle shop. If Mas builds the large bicycle shop, he will earn $60,000 if the market is favorable, but he will lose $40,000 if the market is unfavorable. The small shop will return a $30,000 profit in a favorable market and a $10,000 loss in an unfavorable market. At the present time, he believes that there is a 50-50 chance that the market will be favorable. His old marketing professor will charge him $5,000 for the marketing research. It is estimated that there is a 0.6 probability that the survey will be favorable. Furthermore, there is a 0.9 probability that the market will be favorable given a favorable outcome from the study. However, the marketing professor has warned Mas that there is only a probability of 0.112 of a favorable market if the marketing research results are not favorable. Mas is confused.
b. Should Mas use the marketing research?
c. Mas, however, is unsure the probability of a favorable marketing research study is correct. How sensitive is Mas’s decision to this probability value? How far can this probability value deviate from 0.6 without causing Mas to change his decision?