Question

Kerrie Smith is thinking about opening a spa boutique in her hometown. Kerrie can open a...

Kerrie Smith is thinking about opening a spa boutique in her hometown. Kerrie can open a small shop, a large shop, or no shop at all. The profits will depend on the size of the shop and whether the market is favorable or unfavorable for her business. Kerrie is also thinking about purchasing a marketing research study. If the study is conducted, the study could be favorable (predict a favorable market) or unfavorable (predict an unfavorable market). If she builds the large shop, she will earn $120,000 if the market is favorable, but will lose $80,000 if the market is unfavorable. The small shop will return a $80,000 profit if the market is favorable and lose $40,000 if the market is unfavorable. She believes there is a 50-50 chance that the market will be favorable. There would be a charge of $13000 for the research study. It is estimated there is a 70% the survey would be favorable. Further, there is a 88% probability that the market will be favorable given a favorable study. However, there is only a 20% probability of a favorable market if the marketing research results are not favorable. a. Calculate EMVs and draw a decision tree (20 pts) b. Write out the recommended strategy (2 pts) c. Calculate EVSI for how much she would be willing to pay for the research study (3 pts)

Homework Answers

Answer #1

The EMV's are calculated at each node in the tree diagram.

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