7.01_econ_11 - Decision-Tree Analysis 1 M Pore - 7.01 -...

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1   ©M Pore  -  7.01  -  econ 11.ppt Decision-Tree Analysis Decision-Tree Analysis
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2   ©M Pore  -  7.01  -  econ 11.ppt Decision Tree Analysis A graphical tool for  describing  1. the  actions   available to the  decision-maker,  2. the  events  that can  occur, and  3. the  relationship   between the actions  and events.
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3   ©M Pore  -  7.01  -  econ 11.ppt Decision Tree for New Product Introduction A Company is considering marketing a new product.  Once  the product is introduced, there is a 70% chance of  encountering a competitive product. Two options are available  each situation. Option 1 (with competitive product) : Raise your price  and see how your competitor responds. If the competitor  raises price, your profit will be $60. If they lower the price,  you will lose $20.  Option 2 (without competitive product) : You still have  two options: raise your price or lower your price.  The conditional profits associated with each event along with  the likelihood of each event is shown in the decision tree. 
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4   ©M Pore  -  7.01  -  econ 11.ppt Conditional Profit Decision Points Events ( ) Probability Do not market Market Competitive Product (0.7) No Competitive Product (0.3) High Low High Low High Low High Low $60 -$20 $40 $10 $100 $30 (0.5) (0.5) (0.2) (0.8) $0 Our Price Competitor’s price First Decision Point Second Decision Point Constructing a Decision Tree
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5   ©M Pore  -  7.01  -  econ 11.ppt Rollback Procedure • To analyze a decision tree, we begin at the end  of the tree and work backward. • For each chance node, we calculate the  expected monetary value (EMV) , and place it  in the node to indicate that it is the expected  value calculated over all branches emanating  from that node.
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This note was uploaded on 03/19/2008 for the course EE 366 taught by Professor Pore during the Spring '08 term at University of Texas at Austin.

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7.01_econ_11 - Decision-Tree Analysis 1 M Pore - 7.01 -...

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