You are considering opening a snack near the LAU campus. There are two possible sites under consideration. 0ne is relatively small while the other is a large site.
If you open the small site and demand is good $50,000 profit can be guaranteed. However, if demand is low, then a loss of $10,000 will occur.
If you open the large site and the demand is good, profit will be $80,000; however, if demand is low, you will lose $30,000.
Obviously, you always have the third option of not adopting either of the alternatives.
You have estimated that there is a 50% chance that the demand will be high.

A friend of yours advises you to contract a consulting agency for a market survey that will cost you $C dollars but will give you as a result that the snack food market is favorable (Positive result) or that the food market is unfavorable (negative result). This agency has historical records from old similar surveys that show the following:
Probability (Good demand/The study is favorable) =0.8
Probability (Good demand/The study is unfavorable) =0.1

Again, favorable study means that the market survey will encourage you to go forward and open the snack business. Likewise, unfavorable study indicates that the market survey advises you not to open the snack business.

Morepover, the consulting agency has records that show that in the past, they have done 120 similar studies for food businesses and 72 studies ended to have a favorable outcome while 48 recommended an unfavorable outcome.

Your job is to build the decision tree for this problem and answer the following questions:
1. What is the best alternative if no consultant is hired?
2. What is the expected monetary value with perfect information?
3. What is the maximum value you will pay for perfect information?
4. If the consulting agency charges you “C” dollars for performing the market survey; determine what is the best course of action if the survey is adopted.
5. What is the range of values of “C” that will allow you to go with hiring the consulting agency.

Answer rating: 100% (QA)

Payoff table high demand low dema... View the full answer