Mr. Smith is thinking about opening a bicycle shop in hishometown. He loves to take his own bike on 50-mile trips with hisfriends, but he believes that any small business should be startedonly if there is a good chance of making a profit. Jerry can open asmall shop, a large shop, or no shop at all.
Mr. Smith has done some analysis about the profitability of thebicycle shop. If Jerry builds the large bicycle shop, he will earn$60,000 if the market is favorable, but he will lose $40,000 if themarket is unfavorable. The small shop will return a $30,000 profitin a favorable market and a $10,000 loss in an unfavorable market.The chance of Favorable market and unfavorable market is 50-50.
His old marketing professor will charge him $5,000 for themarketing study. It is estimated that there is a 50% probabilitythat the survey will be favorable and 50% unfavorable study.
Furthermore, he has given the following probabilities:
Probability that the market will be favorable given a favorableoutcome from the study 90%
Probability that the market will be unfavorable given afavorable outcome from the study 10%
Probability that the market will be favorable given anunfavorable outcome from the study 12%
Probability that the market will be unfavorable given anunfavorable outcome from the study 88%
- Compose the decision tree (25 pts)
- What is Mr.Smith best option (show all your calculations andinterpret the results explain it) (65 pts)
- What is the Expected Value of Sample of Information (EVSI) ?(10 pts)
