Question

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 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 successful.

Question 9 of 9

20.0 Points

Construct a decision tree by fill-in the blanks below in reference to the following chart.

The decision choice at Decision 1 is___________ and that at Decision 2 is__________ Event 1 is___________ and Event 2 is___________ .

The probability for Prob1 is ____________ and that for Prob2 is______________ .

Payoff 1 is_________and Payoff 2 is_____________ .

EMV 1 is ____________and EMV 2 is _________________

Answer 1

The probability for Prob1 is ____________ and that for Prob2 is______________ .

Answer:- 0.5 and 0.5

Payoff 1 is_________and Payoff 2 is_____________ .

Answer:- Payoff 1 is 0.5 X $100,000 =$50000

Payoff 2 is 0.5 X (-$40,000) = $20000

EMV 1 is ____________and EMV 2 is _________________

Answer:- EMV 1 = 0.5 X $100,000 + 0.5 X (-$40,000) = $30,000

EMV 2 =0