1) A group of medical professionals is considering the construction of a private
ID: 3076656 • Letter: 1
Question
1) A group of medical professionals is considering the construction of a private clinic. If the medical demand is high ( i.e., there is a favorable market for the clinic), the physicians could realize a netprofit of $100,000. If the market is not favorable, they could lose $40,000. Of course, they do not have to proceed at all, in which case there is no 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.A) Construct a decision tree to help analyze this problem. What should the medical professionals do?
B) The physicians in the previous problem have been approached by a market research firm that offers to perform a study of the market at a fee of $5,000. The market researchers claim their experience enables them to use Bayes' theorem to make the following statements of probability:
Explanation / Answer
Favorable market= (0.5) 100,000 = 50,000. Not a favorable market=(0.5) -40,000 = -20,000 The state of nature to do nothing =$0. expected monetary values (EMVs) for each state of nature node. The EMV for Node 1 = $50,000 – 20,000 = $30,000 The state of the nature node --------------------highest EMV should be selected Construct a private clinic -------------------- it has the highest EMV the payoff to do nothing (0dollars
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