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Probability - small shop, large shop, or no shop

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Jerry can open up a small shop, large shop, or no shop. There will be a 5 year lease on a building he wants to make the correct decision. Jerry is also thinking about hiring a consultant to conduct a market research study. If the study is conducted, the results could be either favorable or unfavorable.

Develop a decsion tree for Jerry.

Part II

Options Favorable unfavorable
Large shop $60000 -$40000
Small shop $30000 -$10000

Jerry believes there is a 50-50 chance that the market will be favorable.
The consultant will charge him $5000 for the marketing research. It is estimated that there is a 0.6 probability that the survey will be favorable. There is a 0.9 probability that they market will be favorable given a favorable outcome from the study. The consultant warned Jerry that there is only a probability of 0.12 of a favorable market if the marketing research results are not favorable. Jerry is confused.

A. Should Jerry use the marketing research? Why
B. Jerry is unsure the 0.6 probability of a favorable marketing research study is correct. How sensitive is Jerry's decision to this probabilty value?
C. How far can this probability value deviate from 0.6 without causing Jerry to change his decision?

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Solution Summary

1. Word file contains decision tree with all details, computations, and explanation to all answers
2. Excel file contains expected value calculations, formulas sheet, and sensitivity analysis graph.

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