Decision Tree

Use powerpoint to sketch your decision tree with EMV, payoff, probabilities, labels, and decision

You plan to start your own cafe after graduation. You have to decide to start with a small, medium, or large shop. A consultant's report indicates a .35 probability that demand will be low and a .65 probability that demand will be high.

If you start with a small shop and demand turns out to be low, the payoff will be $96,000; if demand turns out to be high, you can either subcontract and realize the payoff of $96,000 or expand for a payoff of $108,000.

You can start with a medium-size shop as a hedge: If demand turns out to be low, its payoff is estimated at $54,000; if demand turns out to be high, you could do nothing and realize a payoff of $98,000, or expand and realize a payoff of $120,000.

If you start with a large shop and demand is low, the payoff will be -$45,000, whereas high demand will result in a payoff of $150,000