Question

A contractor has the opportunity to choose between building a house or doing two extension works in the next 6 months. If you build the house and sell it, you can make $25,000. However, if the housing market is affected by the increase in mortgage interest rates and would lose $5,000. On the other hand, you can earn $17,000 by performing both expansion jobs, regardless of market behavior. Based on excel QM which matrix would you deal with? 

a) Develop a payment matrix for this problem 

b) What alternative should be chosen if the contractor is an optimist? 

c) What alternative should be chosen if the contractor is a pessimist?

Answer 1

Based on excel QM which matrix would you deal with?

ANSWER

The expected value of the house is $25,000, while the expected value of the two extension works is $17,000. 

Therefore, the contractor should choose to build the house.

 

 

a) Develop a payment matrix for this problem  

ANSWER

The payment matrix for this problem is as follows: 

House: $25,000 

Extension work 1: $17,000 

Extension work 2: $17,000 

Total: $59,000 

 

 

b) What alternative should be chosen if the contractor is an optimist?  

ANSWER 

The contractor should choose to build the house if they are an optimist, as they believe that they will make a profit from the sale. 

 

 

c) What alternative should be chosen if the contractor is a pessimist? 

ANSWER 

The contractor should choose to perform both extension works if they are a pessimist, as they believe that they will not make a profit from the sale of the house.