A group of medical professionals is considering the construction of a private cl

Question

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?

Explanation / Answer

Favorable market= (0.5) 100,000 = 50,000.

Not a favorable market=(0.5) -40,000 = -20,000

The state of nature to do nothing =$0.

expected monetary values (EMVs) for each state of nature node.
The EMV for Node 1 =       $50,000 – 20,000 = $30,000

The state of the nature node --------------------highest EMV should be selected

Construct a private clinic -------------------- it has the highest EMV

the payoff to do nothing (0dollars

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