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Microsoft Word – final exam fall 2013.docx

Question 4

You are a real estate developer and are trying to determine the EMV of your net commission from a sales call to a potential purchaser.

Assume that your transportation cost is $1.45 per mile Assume that the sales call is 70 miles round trip

Assume that your transportation time is 2.25 minutes per mile Assume that the value of your time for transportation is $55.00 per hour Assume that it will take 3 hours to meet with the potential purchaser Assume that the value of your time for the customer meeting is $150.00 per hour Assume that you will have a 19% chance of a successful sales call (sales call #1)

If sales call #1 is successful, you will sell a house valued at $275,000 with likelihood = 55%

you will sell a house valued at $300,000 with likelihood = 35%

you will sell a house valued at $425,000 with likelihood = 10%

Assume that your commission will be 2.5% of the value of the house if sales call #1 is successful.

a) What is the expected cost (time and transportation) of sales call #1?

b) Without assuming that the sales call will be successful (that is, it may or may not be a success), what is the expected gross commission of sales call #1 (do not net out the expected costs)?

Suppose you have a second possible sales call (sales call #2). Assume that the expected cost remains the same and that the commission rate remains 2.5%, but that the following information is the different information for sales call #2.

Assume that you will have a 12% chance of a successful sales call (sales call #2) If sales call #2 is successful, you will sell a house

valued at $285,000 with likelihood = 45% you will sell a house valued at $320,000 with likelihood = 25% you will sell a house valued at $355,000 with likelihood = 30%

c) Assuming that your sales call is successful, which sales call is the maximin sales call? (Don’t simply define maximin, but use values to justify your response).