1. Dick Holliday is not sure what he should do. He can build either a large video rental section or a small one in his drugstore. He can also gather additional information or simply do nothing. If he gathers additional information, the results could suggest either a positive or a negative market. Holliday believes that there is a fifty-fifty chance that the information will be positive. If the rental market is favorable, Holliday will earn $15,000 with a large section or $5,000 with a small. Within an unfavorable video-rental market, however, Holliday could lose $20,000 with a large section or $10,000 with a small section. Without gathering additional information, Holliday estimates that the probability of a favorable rental market is 0.7. A positive report from the study would increase the probability of a favorable rent market to 0.9. Furthermore, a negative report from the additional information would decrease the probability of a favorable rental market to 0.4. Of course, Holliday could forget all these numbers and neither build video sections nor gather additional information. What is your advice to Holliday? What is the expected value of perfect information?
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