Mary is considering opening a new grocery store in town. She is evaluating three sites: downtown, the mall, and out at the busy traffic circle. Mary calculated the value of successful stores at these locations as follows: downtown, $250,000; the mall, $300,000; the circle, $400,000. Mary calculated the losses if unsuccessful to be $100,000 at either downtown or the mall and $200,000 at the circle. Mary figures her chance of success to be 50% downtown, 60% at the mall, and 75% at the traffic circle.
A) Draw a decision tree for Mary and select her best alternative.
B) Mary has been approached by a marketing research firm that offers to study the area to determine if another grocery store is needed. The cost of this study is $30,000. Mary believes there is a 60% chance that the survey results will be positive (show a need for another grocery store). SRP=SRP=survey results positive, SRN=SRN= survey results negative, SD=SD=success downtown, SM=SM=success at mall, SC=SC=success at circle, SD'=SD′=don’t succeed downtown, and so on. For studies of this nature:
P (SRP | success) =0.7, P (SRP | success) =0.7,
P (SRN | success) =0.3, P (SRN | success) =0.3,
P (SRP | not success) =0.2, P (SRP | not success) =0.2, and
P (SRN | not success) =0.8. P(SRN | not success)=0.8.
Calculate the revised probabilities for success (and not success) for each location, depending on survey results.
C) How much is the marketing research worth to Mary? Calculate the EVSI.