Practice Questions on Decision Analysis - Exam III.docx - Practice Questions on Decision Analysis 1(Q 34 in textbook A group of medical professionals is

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Practice Questions on Decision Analysis
1. (Q 34 in textbook) A group of medical professionals is consideringthe 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 anet 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 casethere is no cost. In the absence of any market data, the best physicianscan guess is that there is a 50-50 chance that the clinic will besuccessful. Construct a decision tree to help analyze this decision problem. What should the physicians do?
Do not construct Favorable Market \$100,000 Unfavorable Market -\$40,000 Construct Clinic B Favorable Market Unfavorable Market A A Construct Clinic B Do not construct \$0 0.5 0.5
Favorable Market \$100,000 \$30,000 Unfavorable Market -\$40,000 Expected Monetary Value of Node B: 0.5 X \$100,000 + 0.5 X (-\$40,000) = \$30,000 At Node A: there are two alternatives Construct Clinic \$30,000 Do not construct \$0 Thus, choose “Construct Clinic”, Expected Monetary Value of Node A becomes \$30,000. Construct Clinic B Do not construct \$0 0.5 0.5 \$30,000 A
2) The physicians have been approached by a market research firm that offers toperform a market study at a fee of \$5000. The market researchers claim thattheir experience enables them to make the following estimations: P (a favorable market | a favorable market-study result) = 0.82 P (an unfavorable market | a favorable market market-study result) = 0.18 P (an unfavorable market | an unfavorable market-study result) = 0.89 P (a favorable market | an unfavorable market-study result) = 0.11 P (a favorable market-study result) = 0.55 P (an unfavorable market-study result) = 0.45 a)Construct a decision tree to help analyze this decision problem. b)What should the physicians do? c)What is the maximum amount of money that physicians should be willing topay for a market-study
Do not \$0 construct Favorable Market \$100,000 Solution Result F 0.89 Unfavorable Market Do not construct -\$5,000
A Construct Clinic B Unfavorable Market Do not construct Conduct Market Study C Favorable Result Unfavorable Result D Do not construct Construct Clinic F E Favorable Market Unfavorable Market Do not construct G Favorable Market Unfavorable Market Construct Clinic
Do not \$0 construct Favorable Market \$100,000 Favorable Market Result F 0.89 Unfavorable Market Do not construct -\$5,000
Unfavorable Market -\$40,000 A Construct Clinic B Conduct Market Study C Favorable Result Unfavorable D Do not construct Construct Clinic E Favorable Market Unfavorable Market G Favorable Market -\$5,000 \$95,000 -\$45,000 \$95,000 -\$45,000 0.5 0.5 0.82 0.18 0.11 0.55 0.45 Construct Clinic