group of medical professionals is considering the construction of a private clin

Question

group of medical professionals is considering the construction of a private clinic. If the medical de- mand is high (i.e., 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. Of course, they don’t 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 suc- cessful. Construct a decision tree to help analyze this problem. What should the medical professionals do?

Explanation / Answer

Decision tree looks as follows:

Now calculated expected value of gain

E(gain) = 0.5(100000)+0.5(-40000)

= 30000 dollars

As gain is positive, the medical professionals can start this project.

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