a) (20%) A group of medical professionals is considering the construction of a private clinic. If the medical demand is high the physician could realize a net profit of $100,000. If the market is not favourable they could lose $40,000. Their best guess is 50%-50% for the clinic to be successful. Construct the decision tree. EMV=Expected Monetary Value(
b) (50%) The same physicians above have been approached by a market research company that offered to perform a study at a fee of $5,000. Using the Bayes’ theorem they make the following probabilities:
Favorable market given a favorable study = .82
Unfavorable market given a favorable study = .18
Favorable market given unfavorable study = .11
Probability of favorable research study = .55
Probability of unfavorable research study = .45
Develop the decision tree to reflect the probabilities above
c) (10%) Describe how you would determine the best decision using EMV criterion with a decision tree.
d) (10%) What is the purpose of the utility theory?
e) (10%) What information should be included into the decision tree?