A client has an estate agent to sell three properties A, B and C for him and agrees to pay him 5% commission on each sale. He specifies certain conditions. The estate agent must sell property A first, and this he must do within 60 days. If and when A is sold the agent receives his 5% commission on that sale. He can then either back out at this stage or nominate and try to sell one of the remaining two properties within 60 days. If he does not succeed in selling the nominated property in that period, he is not given opportunity to sell the third property on the same conditions. The prices, selling costs (incurred by the estate agent whenever a sale is made) and the estate agent’s estimated probability of making a sale are given below:
Price of Property K
Selling Costs in K
Probability of Sales
(1) Draw up an appropriate decision tree for the estate agent.
(2) What is the estate agent’s best strategy under Expected monitory value approach (EMV)?