Compute the probability at which the decision changes

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Reference no: EM132308012

You own a townhouse in North York with a living area of 3100 square feet. You have recently learned that 20 homes with areas of at least 3000 square feet will be randomly selected and considered for possible condemnation as housing sites for dependent adults. You estimate that you will lose $20,000 in real estate value if your home is one of the 20 selected, so you consider selling your home before the selection is made. When you sell a home, however, the real estate agent charges a 5% commission on the sale price. Of course, you will still need a place to live, so if you either lose your home or sell it, you will buy a new home worth exactly the same amount as your current home (which means you will have to pay the difference out of your own pocket).

Construct a decision tree for this problem.

Refer to the data in the file “North York homes” to estimate the proportion of homes with living areas of at least 3000 square feet.

Given that (according to the latest census) there are 64,357 homes in North York, use the result from part b to find the expected number of homes with living areas of at least 3000 square feet.

Use the result from part c and the fact that 20 homes will be selected to estimate the probability that your home will be chosen.

Refer to the data in the file “North York homes” to compute the average sales price for homes with living areas of at least 3000 square feet.

Use the results from parts d and e to complete the tree and determine the best course of action.

Do you believe this decision should be made according to expected value or not? Justify briefly (2-3 sentences maximum).

Draw a sensitivity graph, showing expected value of each alternative as a function of the probability of being selected.

Compute the probability at which the decision changes.

Reference no: EM132308012

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