Problem 3: A group of doctors is considering the construction of a private clinic. IF the medical demand is high (favorable market for the clinic), the physicians could realize a profit of P1,000,000. If the market is not favorable they could lose P400,000. If they don’t proceed at all, there is no cost. In the absence of any market research, the best the physician can guess is that there is a 50-50 chance the clinic will be successful. Required: Construct a decision tree to help analyze this problem. What should the doctors do? Problem 4: Continuing with problem 3, a firm open to conduct a market research involving the proposed venture and using analytical tools can give an accurate information, thus gave the following info: Probability of a favorable market given a favorable study is 0.82 Probability of an unfavorable market given a favorable study is 0.18 Probability of a favorable market given an unfavorable study is 0.11 Probability of an unfavorable market given an unfavorable study is 0.89 Probability of a favorable research study is 0.55 Probability of an unfavorable research study is 0.45 Required: Develop a new decision tree for the doctors to reflect the options now open with the market study. Use the EMV approach to recommend a strategy. What is the expected value of information?
Problem 3:
A group of doctors is considering the construction of a private clinic. IF the medical demand is high (favorable market for the clinic), the physicians could realize a profit of P1,000,000. If the market is not favorable they could lose P400,000. If they don’t proceed at all, there is no cost. In the absence of any
Required:
Construct a decision tree to help analyze this problem. What should the doctors do?
Problem 4:
Continuing with problem 3, a firm open to conduct a market research involving the proposed venture and using analytical tools can give an accurate information, thus gave the following info:
Probability of a favorable market given a favorable study is 0.82
Probability of an unfavorable market given a favorable study is 0.18
Probability of a favorable market given an unfavorable study is 0.11
Probability of an unfavorable market given an unfavorable study is 0.89
Probability of a favorable research study is 0.55
Probability of an unfavorable research study is 0.45
Required:
- Develop a new decision tree for the doctors to reflect the options now open with the market study.
- Use the EMV approach to recommend a strategy.
- What is the expected value of information?
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