Your friend wants you to buy a house for $100,000. If the market improves, you will...
- Your friend wants you to buy a house for $100,000. If the market improves, you will sell the house in one year for a price of $125,000. Otherwise, you’ll end up selling the house for $80,000. If your economist friend predicts there is a 60% chance that the market will improve, should you make this investment?
Homework Answers
Cost of the house = $100,000
P(market will improve) = 0.60
P(market will not improve) = 1 - 0.60 = 0.40
Expected selling value = Selling value for improved market conditions x P(market will improve) + Selling value if market does not improve x P(market will not improve)
= 125,000x0.6 + 80,000x0.4
= 107,000
Expected selling value > Cost of the house. This means, you expect to get a profit
Therefore, you should make this investment
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