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Problem 3-28

Problem 3-28.

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Problem 3-28

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  1. Problem 3-28 A group of medical professionals is considering the construction of a private clinic. If the medical demand is high (i.e., there is a favorable market for the clinic), the physicians could realize a net profit of $100,000. If the market is not favorable, they could lose $40,000. Of course, they don’t have to proceed at all, in which case there is no cost. In the absence of any market data, the best the physicians can guess is that there is a 50-50 chance the clinic will be successful. Construct a decision tree to help analyze this problem. What should the medical professionals do? Angie Cook

  2. Construction of a Private Clinic • The alternative of the Decision Node is to Construct Private Clinic. • The state of nature node 1 • Favorable market • (0.5) 100,000 = 50,000. • Not a favorable market • (0.5) -40,000 = -20,000 • The state of nature to do nothing is $0. Angie Cook

  3. Solve the expected monetary values (EMVs) for each state of nature node.The EMV for Node 1 $50,000 – 20,000 = $30,000The state of the nature node with the highest EMV should be chosen. Construct a private clinic since it has the highest EMV and the payoff to do nothing is $0. Angie Cook

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