# The city of Belgrade, Serbia, is contemplating building a second airport to relieve congestion at…

The city of Belgrade, Serbia, is contemplating building a second airport to relieve congestion at the main airport and is considering two potential sites, X and Y. Hard Rock Hotels would like to purchase land to build a hotel at the new airport. The value of land has been rising in anticipation and is expected to skyrocket once the city decides between sites X and Y. Consequently, Hard Rock would like to purchase land now. Hard Rock will sell the land if the city chooses not to locate the airport nearby. Hard Rock has four choices: (1) buy land at X, (2) buy land at Y, (3) buy land at both X and Y, or (4) do nothing. Hard Rock has collected the following data (which are in millions of euros): Site X 26 40 Site Y 18 40 4 Current purchase price Profits if airport and hotel built at this site Sale price if airport not built at this site Hard Rock determines there is a 60% chance the airport will be built at X (hence, a 40% chance it will be built at Y). a) Set up the decision table (in millions of euros) (enter your responses as whole numbers and include a minus sign if necessary). States of Nature Alternatives buy land at X buy land at Y buy land at both X and Y do nothing Probability airport at X airport at Y – 14 0.40 0.60 b) What should Hard Rock decide to do to maximize total net profit? The best alternative is V with a total net profit ofmillion euros (round your response to one decimal place)

## Solutions

##### Expert Solution
 Airport at X Airport at Y Alternatives Buy land at X 14 -15 Buy land at Y -14 22 Buy land at X and Y 0 7 Do nothing 0 0 0.6 0.4

Payoff with buying land at X = 0.6×14+0.4x(-15 )= 2.4

Payoff with buying land at Y = 0.6x(-14) +0.4×22 = 0.4

Payoff with buying land at X and Y = 0+0.4×7 =2.8

Payoff with doing nothing =0

Payoff with buying land at both locations is the most attractive
option as it has highest payoff of 2.8 million Euros