An entrepreneur wants to determine whether it would be profitable to establish a gardening service in a local suburb. The entrepreneur believes that there are four possible levels of demand for this gardening service:

Very low demand-1% of the households would use the service.

Low demand-5% of the households would use the service.

Moderate demand-10% of the households would use the service.

High demand-25% of the households would use the service.

Based on past experiences in other suburbs, the entrepreneur assigns the following probabilities to the various demand levels:

P1Very low demand2 = 0.20

P1Low demand2 = 0.50

P1Moderate demand2 = 0.20

P1High demand2 = 0.10

The entrepreneur has calculated the following profits or losses ($) of this garden service for each demand level (over a period of one year):

Action

DEMAND........Provide Garden Service......Do Not Provide Garden Service

Very low....................-50,000.....................................................0

Low.........................100,000......................................................0

Moderate....................200,000......................................................0

High.........................400,000.....................................................0

a. Construct a decision tree.

b. Construct an opportunity loss table.

c. Compute the expected monetary value (EMV) for offering this garden service.

d. Compute the expected opportunity loss (EOL) for offering this garden service.

e. Explain the meaning of the expected value of perfect information (EVPI) in this problem.

f. Compute the return-to-risk ratio (RTRR) for offering this garden service.

g. Based on the results of (c), (d), and (f), should the entrepreneur offer this garden service? Why? Before making a final decision, the entrepreneur conducts a survey to determine demand for the gardening service. A random sample of 20 households is selected, and 3 indicate that they would use this gardening service.

h. Revise the prior probabilities in light of this sample information.

i. Use the revised probabilities in (h) to repeat (c) through (g).