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ISDS question related to probability Housing A company must decide whether to leave its model homes unfurnished, furnished with minimal accessories,

ISDS question related to probability


Housing A company must decide whether to leave its model homes unfurnished, furnished with minimal accessories, or completely furnish them using a custom decorator. The result of the decision is affected on the condition of the housing market. The following is the payoff table


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They have an internal forecaster who thinks that:

P(weak)=0.2

P(moderate)=0.4

P(strong)=0.3

P(very strong)=0.1


They also consider to hire a consultant who to conduct economic forecasting for improving the probability estimate. Based on his past experience, these are his predictions:


P(economy rise|weak market)=0.4

P(economy rise|moderate market)=0.7

P(economy rise|strong market)=0.8

P(economy rise|very strong market)=1

P(economy down|weak market)=0.6

P(economy down|moderate market)=0.3

P(economy down |strong market)=0.2

P(economy down |very strong market)=0


Calculate the payoff and determine the decision the company should make using each of the decision making under certainty criterion.

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