HW #2 Part 3 Multi-Stage Decision Tree - HW#2(Part 3 3-36(Medical Clinic A group of medical professionals is considering the construction of a

HW #2 Part 3 Multi-Stage Decision Tree - HW#2(Part 3...

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HW #2 (Part 3) 3-36 (Medical Clinic) 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. Construct a decision tree to help analyze this problem. What should the medical professionals do? Decision tree Computational Analysis Alternative 1: Construct Private Clinic EMV(1) = [( Payoff of Constructing Private Clinic and getting a Favorable Market ) × ( Probability of getting a Favorable Market )] + [( Payoff of Constructing Private Clinic and getting an Unfavorable Market ) × ( Probability of getting an Unfavorable Market )] EMV(1) = [$100,000 x 0.50] + [-$40,000 x 0.50] EMV(1) = $50,000 + -$20,000 EMV(1) = $30,000 Alternative 2: Do Nothing EMV(2) = $0

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