1. When purchasing a home, one occasionally hears about the possibility of "renting with an option to buy." This arrangement can take various forms, but a common one is that the renter simply pays rent and may purchase the house at an agreed-upon price. Rental pay ments typically are not applied toward purchase. The owner is not permitted to sell the house to another buyer unless the renter/option holder waives the right to purchase. The duration of the option may or may not be specified.
Suppose that a buyer is considering whether to purchase a house outright or rent it with an option to buy. Under what circumstances would renting with an option be a dominated alternative? Under what circumstances would it definitely not be dominated?
2. What role does sensitivity analysis play in the development of a requisite decision model?
3. Explain why the lines separating the three regions in Figure 5.12 all intersect at Point D.