Briefly describe the concept of expected value

Reference no: EM132797935

Question - A large hospital is soliciting competitive bids to contractors for the construction of a new wing. The hospital's procurement auction will use a first-price sealed-bid mechanism. Your construction company plans to bid for this business. You have data on the historical bid frequencies of the average bidder for construction jobs in this area. These data indicate that, for an average bidder, the proportion of relative bids that exceed a relative bid of 1.05 equals 0.84, and the proportion of relative bids that exceed a relative bid of 1.10 equals 0.70. However, for one particular competitor - Rutledge Construction - you estimate its likelihood of exceeding a relative bid of 1.05 equals 0.65 and its likelihood of exceeding a relative bid of 1.10 equals 0.50.

(a) Briefly describe the concept of expected value. Then, consider this situation: if the roll of a single die shows a 3, you will win $12, but if it shows any other number, you will win nothing. Given this situation, what is the maximum amount one should pay for a roll of the die?

(b) In the procurement auction, you expect to be bidding against two average bidders and Rutledge Construction. Calculate the probability of your company winning the job with the relative bid of 1.05 and the probability of your company winning the job with the relative bid of 1.10. Show your work.

(c) You estimate that your company's costs to build the new hospital wing would be $750,000. Given your answers to Part (b), calculate the expected profit for your company of the relative bid of 1.05 and of the relative bid of 1.10. Show your work. Based on these calculations, which of these two relative bids should your company bid?

Reference no: EM132797935

Questions Cloud

What is global cost of retained earnings : Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity. 39. Refer to Global Advertising Company. What is Global's cost

What evidence-based protocols can the nurse utilize : What evidence-based protocols can the nurse utilize for prevention of pressure injuries? Develop a nursing CARE PLAN for an older adult at risk for pressure.

How can the software manual help you : How can the software manual help you? (Write in points). Quote any real life detailed example of manual reading.

Survive and competitive in the consultation industry : Global competition implies a global environmental strategy that gives birth to new competency standards. In this condition every company that wants

Briefly describe the concept of expected value : Briefly describe the concept of expected value. Then, consider this situation: if the roll of a single die shows a 3, you will win $12

What are the negative effects of a culture : We have noted throughout this chapter, and the text overall, that honesty is generally the best policy in managing OB. But that doesn't mean honest dealing

Set up the gardens and recruit participants : Unit Name and code: CHCCCS007 - Develop and implement service programs

What strategy should the investor follow : As of July 1, the investor owns 50,000 shares. The market price of each share is $ 30. What strategy should the investor follow

Explain the importance of having an integrated approach : Explain the importance of having an integrated approach such as cognitive behavioral therapy, reality therapy, and so forth to client treatment when a client.

User Account

All Pages