3-34.

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 dont 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 5050
chance the clinic will be successful. Construct a decision tree to help
analyze this problem. What should the medical professionals do?
Answer :

$30000

$30000

Favorable
Market
(0.5)
Unfavorab
le Market
(0.5)

$100000
$40000

EMU Node 1 = (0.5) (100000) + (0.5) (-40000)

= $30000

3-38. Bill Holliday is not sure what she should do. He can either build a quadplex
(i.e., a building with four apartments), build a duplex, gather additional
information, or simply do nothing. If he gathers additional information, the
results could be either favorable or unfavorable, but it would cost him
$3,000 to gather the information. Bill believes that there is a 5050chance
that the information will be favorable. If the Rental market is favorable, Bill
will earn $15,000 With the quadplex or $5,000 with the duplex. Bill doesnt
have the financial resources to do both. With an unfavorable rental market,
however, Bill could Lose $20,000 with the quadplex or $10,000 with the
duplex. Without gathering additional information, Bill estimates that the
probability of a favorable rental market is 0.7. A favorable report from the
study would increase the probability of a favorable rental market to 0.9.
Furthermore, an unfavorable report from the additional information would
decrease the probability of a favorable rental market to 0.4. Of course, Bill
could forget all of these numbers and do nothing. What is your advice to
Bill?
Answer :

EMV (Rude 2) = 15000 (0.7) + (-20000) 0.3 = 4500

EMV
EMV
EMV
EMV
EMV
EMV

(Rude
(Rude
(Rude
(Rude
(Rude
(Rude

3)
4)
5)
6)
7)
1)

=
=
=
=
=
=

5000 (0.7) + (-10000) 0.3 = 500

12000 (0.9) + (-23000) 0.1 = 8500
2000 (0.9) + (-13000) 0.3 = -2100
12000 (0.6) + (-23000) 0.4 = -2000
2000 (0.6) + (-13000) 0.4 = -4000
8500 (0.5) + (-3000) 0.5 = 2750

2
(Quadplex)

B
(Do Not
Conduct)

3
(Duplex)

No Facility

4
(Quadplex)

A
(Conduct
Study)

5
(Duplex)

No Facility

6
(Quadplex)

7
(Duplex)

No Facility

(0.7) Market
Favorable

$15000

(0.3) Market
Unfavorable

$-12000

(0.7) Market
Favorable

$5000

(0.3) Market
Unfavorable

$-10000

$0

(0.9) Market
Favorable

$12000

(0.1) Market
Unfavorable

$-10000

(0.9) Market
Favorable

$2000

(0.1) Market
Unfavorable

$-13000

$3000

(0.6) Market
Favorable

$12000

(0.4) Market
Unfavorable

$-23000

(0.6) Market
Favorable

$12000

(0.4) Market
Unfavorable

$-13000

$-3000

3-40. Mark Martinko has been a class A racquetball player for the past five
years, and one of his biggest goals is to own and operate a racquetball
facility. Unfortunately, Marks thinks that the chance of a successful
racquetball facility is only 30%. Marks lawyer has recommended that he

employ one of the local marketing research groups to conduct a survey

concerning the success or failure of a racquetball facility. There is A 0.8
probability that the research will be favorable Given a successful
racquetball facility. In addition, There is a 0.7 probability that the research
will be unfavorable given an unsuccessful facility. Compute Revised
probabilities of a successful racquetball facility given a favorable and given
an unfavorable survey.
Answer :
P (SF) = 0.3
P (RFSF) = 0.8
P (RUUF) = 0.8
P (UF) = 1 - P (SF) = 0.7
P (RUSF) = 1 - P (RFSF) = 0.2
P (RFUF) = 1 - P (PUUF) = 0.3

P ( RF|SF ) P(SF )
P ( RF|SF ) P ( SF ) + P ( RU |UF ) P(UF )

P (SFRF) =

0.8 0.3
0.8 0.3+0.3 0.7

= 0.53
State of

Conditional

Prior

Joint

Poskrior

Name
Favorable

Probability

Probability

Probability

Probability

0.8

0.3

0.24

0.53

0.3

0.7

0.21

0.47

Market
Non Favorable
Market
Total

0.45

So the probabiity of a success full driving range given a favorably research 0.53
and 0.47