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?
This problem requires the utilization of a decision tree, which is a diagram that can be used to determine an optimal course of action. A decision tree entails the use of statistical probability, and it illustrates the various alternate outcomes associated with a decision, represented by distinct branches of the tree, sprawling from left to right. The rightmost branch of the tree represent the end result.
Answer and Explanation:
The decision tree for this problem is illustrated below.
As indicated the medical professional's expected profit is $30,000 (.5*$100,000 + .5*-$40,000). If $30,000 satisfies their required rate of return, the professionals should proceed with construction of the clinic. Otherwise, the risk of the venture is too great to proceed.
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from Introduction to Management: Help and ReviewChapter 2 / Lesson 12