Individual Assignment 6610

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?