Jerry Smith is thinking about opening a bicycle shop in his hometown. He can open a small
Question:
Jerry Smith is thinking about opening a bicycle shop in his hometown. He can open a small shop, a large shop, or no shop at all. If the market is favorable, a large shop will earn $70,000 while a small shop will earn $40,000. If the market is unfavorable, a large shop will lose $30,000 while a small shop will lose $10,000. Opening no shop earns $0. Without conducting a market survey, Jerry's best guess is that there is a 50% chance of a favorable market and a 50% chance of an unfavorable market. Jerry could conduct a market survey for $5,000. There is a 60% chance that the market survey will come back favorable, and a 40% chance that it will come back unfavorable. With a favorable market survey result, there is a 90% chance that the market will actually be favorable, but a 10% chance that the market will be unfavorable. If the market survey comes back unfavorable, then there is only a 12% chance that the market will actually be favorable, and an 88% chance that the market will be unfavorable. Below you will find all of the above information summarized in tables, a decision tree for this scenario, and questions about the scenario. Put your answers in the green boxes.
Quantitative Analysis for Management
ISBN: 978-0132149112
11th Edition
Authors: Barry render, Ralph m. stair, Michael e. Hanna