Philip Musa can build either a large electronics section or a small one in his Birmingham drugstore. He can also gather additional information or simply do nothing. If he gathers additional information, the results could suggest either a favorable or an unfavorable market, but it would cost him $3,000 to gather the information. Musa believes that there is a 50-50 chance that the information will be favorable. If the market is favorable, Musa will earn $15,000 with a large section or $5,000 with a small one.
With an unfavorable electronics market, however, Musa could lose $20,000 with a large section or $10,000 with a small section. Without gathering additional information, Musa estimates that the probability of a favorable market is .7.
A favorable report from the study would increase the probability of a favorable market to .9. Furthermore, an unfavorable report from the additional information would decrease the probability of a favorable market to .4.
Of course, Musa could ignore these numbers and do nothing. What is your advice to Musa?