Decision Analysis Definitions

1. Suppose the city council is considering a policy to abate property taxes for 5 years for new office businesses coming to the central business district and which meet certain criteria (must have at least 20 full-time employees, and at least 80% of payroll must be above 125% of minimum wage).

• Suppose, further, that your analysis determines that the cost of the property tax abatements is likely to range from $1 million (taxes abated, but no significant development) to $6 million (taxes abated and significant development occurs).
• Suppose, also, that even if no tax abatement were offered, the city could might experience as much as $1 million in new development. If a property tax abatement were offered, your analysis determines that the city would probably experience $9 million in new development.
• Finally, suppose that your analysis has determined that the probability of getting any development is 33% without a property tax abatement and 70% with a property tax abatement.

Assuming the city council is risk-neutral, what would you advise? Would you change your recommendation if they were risk-averse?

2. Suppose, in the above problem, that Spiffy Diffy Consultants approaches the Council with a proprietary survey they have developed which (they assert) can predict the likelihood of successful development. The survey has a defined margin of error: Prior research shows that 10% of the time it is inconclusive; 20% of the time it misses subsequent development (i.e., the survey predicts no development when it fact it occurs); and 10% of the time it falsely predicts development (i.e., the survey predicts that development will occur when in the later events it does not). The council wants to know if it is worth it to use this test to determine whether or not there would be development without a tax abatement.

• Since you already know that there is a 33% probability of development without property tax abatement, how much additional confidence will you gain from this test?
• Suppose the survey will cost $10,000. Is it worth it?

Decision

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