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Ch.3pg.104

3-21  During the next year, Allen must decide whether to invest $10,000 in the stock market or in a CD at an interest rate of 9%.  If the market is is good, Allen believes that he could get a 14% return on his money.  With a fair market, he expects to get an 8% return.  If the market is bad, he will most likely get a 0% return.  Allen estimates that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the probability of a bad market is 0.2, and he wishes to maximize his long-run average return.

 

a.  Develop a decision table for this problem

 

2. What is the best decision?

Ch.3pg.104-105

3-28.  A group of medical professionals is considering the contruction of a private clinic.  If the medical demand is high (there is a favorable market for the clinic) the physicians could realize a net profit of $100,000.  If the market is not favorable, they could lose $40,000.  If they don't proceed at all there is $0 cost.  In the absence of any market data, the best the physicians can guess is that there is a 50-50 chance the clinic will be successful.  Construct a decision tree to help analyze this problem.  What should the medical professional do?3-29.  The physicians from problem 3-28 above have been approached by a market research firm that offers to perform a study of the market at a fee of $5,000.  They say the Byes' theorem allows them to make the following statements of probability:

probability of a favorable market given

    a favorable study=0.82

probability of an unfavorable market given

    a favorable study=0.18

probability of a favorable market given

   an unfavorable study=0.11

probability of a unfavorable market given

   an unfavorable study=0.89

probability of a favorable research

     study=0.55

probability of an unfavorable research

     study=0.45

a)  Develop a new decision tree for the medical professionals to reflect the options now open with the market study.b)  Use the EMV approach to recommend a strategy.

c)  What is the expected value of sample information? How much might the physicians be willing to pay for a market study