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A legislative committee is considering an appropriations bill to fund a particular preventative health care program. Experts estimate that spending...

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1. A legislative committee is considering an appropriations bill to fund a particular preventative health care program. Experts estimate that spending money in this preventative care will save more money on other programs. They estimate that the amount spent on the preventative program will influence not only the estimated savings in other programs but also the probabilities of realizing high or low savings. The savings estimates for high, moderate and low spending options are shown in the table below, together with the probabilities expert predict for those savings (all dollar figures in millions of dollars). The spending amounts the legislators are considering are: High Spending = $700 million, Moderate Spending = $400 million, and Low Spending = $100 million. a. Construct a decision tree to aid the legislators in selecting the spending option with the highest expected net savings (net savings = savings minus spending). b. What are the expected net savings of each of the spending options? What option maximizes expected net savings? c. What option minimizes maximum loss (minimax)? What option maximizes maximum net savings (maximax)? savings probability savings probability Spending Option High Spending $1,000 0.7 $350 0.3 Moderate Spending $750 0.5 $250 0.5 Low Spending $500 0.2 $150 0.8 High Savings Estimates Low Savings Estimates
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