Assignment:
Discussion:
Q1: 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
b. What is the best decision?
Q2: 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?
Q3: The physicians from Q2 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?