Stan Buys a 1966 Mustang, Which He Plans to Restore

question 164

Multiple Choice

Stan buys a 1966 Mustang, which he plans to restore and sell. He anticipates that the cost of the car and the repairs will be $15,000 and that he can sell it for $19,000. When he has spent $15,000, he discovers he needs to replace the engine, which will cost $4000. He can sell the car without the new engine for $9000. What should Stan do?

• A) He should complete the repairs and sell the car for $13,000.
• B) He should sell the car now for $9000.
• C) He should never try such an expensive project again.
• D) He should be totally indifferent between finishing the project and selling the car now.

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Definitions:

Lottery

A lottery is a form of gambling which involves drawing lots for a prize, or the allocation of a resource or a chance event resulting in a significant gain to the holder.

Von Neumann-Morgenstern

A theory of expected utility that serves as a foundational framework in the field of game theory, describing strategies for rational decision-making under uncertainty.

Expected Utility

The sum of the utilities associated with all possible outcomes, weighted by the probability of each outcome occurring.

Probability

The quantification of the probability that an event will happen, represented by a number ranging from 0 to 1, with 0 signifying an impossible event and 1 signifying a certain event.