1) 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 netprofit of 100,000$. If the market is not favorable, they could lose $40,000. Of course, they do not 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.
A) Construct a decision tree to help analyze this problem. What should the medical professionals do?
B) The physicians in the previous problem have been approached by a market research firm that offers to perform a study of the market at a fee of $5,000. The market researchers claim their experience enables them to use Bayes' theorem to make the following statements of probability:
• The probability of a favorable market given a favorable study = 0.82
• The probability of an unfavorable market given a favorable study = 0.18
• The probability of a favorable market given an unfavorable study = 0.11
• The probability of an unfavorable market given an unfavorable study = 0.80
• The probability of a favorable study = 0.55
• The probability of an unfavorable study = 0.45
C) Expand the decision tree in part (a) to reflect the options now open with the market study. What should the medical professionals do now?
D) What is the maximum amount the physicians would be willing to pay for the market study?
E) What is the efficiency of the market study's information?