Jerry Young is thinking about opening a bicycle shop in his hometown. Jerry loves to take his own bike on 50-mile trips with his friends, but he believes that any small business should be started only if there is a good chance of making a profit. Jerry can open a small shop, a large shop, or no shop at all. Because there will be a five-year lease on the building that Jerry is thinking about using, he wants to make sure that he makes the correct decision.
Jerry has done some analysis about the profit-ability of the bicycle shop. If Jerry builds the large bicycle shop, he will earn $60,000 if the market is good, but he will lose $40,000 if the market is bad. The small shop will return a $30,000 profit in a good market and a $10,000 loss in a bad market. At the present time, he believes that there is a 59% chance that the market will be good.
Jerry also has the option of hiring his old marketing professor for $5,000 to conduct a marketing research study. If the study is conducted, the results could be either favorable or unfavorable. It is estimated that there is a 0.6 probability that the survey will be favorable. Furthermore, there is a 0.9 probability that the market will be good, given a favorable outcome from the study. However, the marketing professor has warned Jerry that there is only a probability of 0.12 of a good market if the marketing research results are not favorable.
(a) Develop a decision tree for Jerry and help him decide what he should do.
(b) How much is the marketing professor’s information worth? What is the efficiency of this information?