Question

Mary is considering opening a new grocery store in town. She is evaluating two sites: downtown and the mall. Mary has developed the following payoff table showing the projected profit (in $1000s) at each location.

	high demand	low demand
downtown	230	-120
mall	260	-140
no store	0	0

Mary believes that there is a 50% change of high demand.

Mary has been approached by a marketing firm that offers studies in the area to determine if another grocery store is needed. The cost of the survey is $30,000. Mary believes that the probability of a positive survey given high demand is 80% and the probability of a positive survey given low demand is 60%.

Construct a decision tree for this problem

Answer 1

Using the value and probability the following is the decision tree

EMV-875000, Favratle 0920,000 EMV $75,000 Favorable (0.5) Unfavorable (0.5)-100,000 EMV-$140,000 Mall 300,000 Favorable (0.6) EMV $250,000 Unfavorable (0.4) 100,000 Favorable (0.75)400,000 Circie Untavorable (0.25) 200,000 EMV-$250,000