The Architecture Company
An architecture company was invited to submit, until the end of February, two proposals regarding two new university
buildings. The preparation of a proposal for the first building involves a cost of forty (40) thousand Euros. Preparing a
proposal for the second building costs twenty (20) thousand Euros. If the proposal for the first building is accepted, the
company will earn one hundred and twenty (120) thousand Euros. If the proposal for the second building is accepted
the earnings will be seventy (70) thousand Euros. The final profit is given by the total earnings (resulting from the
accepted proposals) minus the total costs of preparation of the proposals. ...view middle of the document...
The two possible results of that
information are: (i) "the proposal would be accepted if submitted", and (ii) "the proposal would not be accepted if
submitted"? Also assume that the maximum EMV criterion is used to make decisions. If the architecture company had
to pay to have access to this "inside information", what would be the maximum it would be willing to pay for it?
(a) If the maximum EMV decision criterion is adopted, should any proposals be submitted? If
yes, for only one building (which one?) or for both? What is the EMV for the optimal
Yes. The proposal should be submitted for both buildings. The EMV for the optimal decision is
22,500€. (See: attached excel “UDM_Excel Tree_assignment 1_group 7”, sheet tab “Problem a”
the green line.)
(b) If the architecture company was risk averse, could the optimal decision be different from that
in the situation of question (a) above?
Yes. A risk averse company would want to minimize the risk of loss. In that sense the choice that
presents least risk is not bidding at all. However if the company were to bid the smaller expected
loss would be bidding for building 2 only.